Strait back to tough times

Research evidence excerpt

Strait back to tough times

Estimates fall, leverage rises

In light of what looks to be a rapid reversion to pre-existing tough trading conditions as

the Iran conflict reaches a conclusion (we observe spot prices for bromine and adipic

acid have retreated from recent Hormuz spikes), we reviewed (cut) our estimates and

end up within 5% of consensus EBITDA across 2026-28. We now forecast 2027 EBITDA

to be EUR570mn vs our prior estimate of EUR610mn. It is worth stressing that

consensus forecasts have halved over the last three years. While many of the challenges

are systemic across the Chemicals sector (such as weak economic activity in Europe and

elevated energy costs), we believe Lanxess has been particularly impacted by

competitive pressures given the lack of pricing power its portfolio possesses.

Portfolio lacks pricing power despite considerable churn

Since Mr Zachert took over as CEO in 2014, approx EUR5bn of assets have been

divested and EUR5bn of assets have been acquired. For context, Lanxess only has an

enterprise value of EUR3.5bn which speaks to either a poor allocation of capital that has

destroyed value (our conclusion), or the market is not yet appreciating the supposed

inherent asset quality. Given that the balance sheet shows just a 1% return on capital,

the business is clearly struggling at present to generate meaningful profits, and

especially cash from the asset base. We see that while consensus ’27 EBITDA forecasts

have halved, free cash flow forecasts have fallen even more – despite capex cuts to a

level we would question whether its sustainable long term (just 1x tangible

depreciation). Leverage has risen to an estimated 4.8x in 2026 inc pension (or 4.0x ex

pension). Refinancing of the outstanding debt in due course at higher rates could have a