Shares in chemicals company Elementis (ELM), edged 0.8% higher to 118p, following press reports that the group is exploring the sale of its chromium activities.
It has also been reported that management is in active discussions with potential acquirers of the business.
Elementis supplies a range of chromium chemicals that are used across a broad range of industrial applications to make products more durable.
The group is the largest producer of chromic acid used for metal and plastic finishing and wood treatment.
The group also produces the widest range of chromic oxide grades and for use in pigments, cosmetics, refractories and chrome metal production.
BENEFITS FROM DISPOSAL
A disposal of the chromium division could improve the quality of the group’s earnings.
During the full year 2021, the division constituted 19.4% of group revenue, but just 11,1% of group earnings. This is indicative of its status as the lowest margin segment within the business.
Divesting the group’s chromium activities might also reduce the cyclicality of group earnings.
The proceeds from the disposal could be used to accelerate the deleveraging process.
In 2020 European Chemicals entity Lanxness disposed of its chrome chemicals business on an enterprise value/sales multiple of 0.83x. This would suggest a potential enterprise value for the Elementis' relevant division of $142 million.
Numis analyst Kevin Fogarty sees ‘a transaction as highlighting the value in the portfolio, as indicated by a full year 2022 enterprise value/earnings before interest tax, depreciation and amortisation of 7.6 times, price to earnings ratio of 13.6 times’.
