Focus is the “in” word at Evonik Industries these days as the chemicals giant turns its attention back to the production of specialist substances. The company recently offloaded its energy subsidiary, STEAG, to a consortium of municipalities for €570 million ($738.4 million), and spun off its substantial real estate holdings into a new subsidiary.
Yet the shift hasn’t stopped Evonik from investing heavily in the world of sports. After twice raising additional capital, the company spent €61.5 million ($79.6 million) on a 15 percent stake in Borussia Dortmund (BVB), one of the country’s top soccer teams and Germany’s only publicly listed club. The purchase makes Evonik the largest shareholder of the Bundesliga team, which it already sponsors.
For a company based in Essen, which like Dortmund is in the industrial northern Ruhr Valley, such a foray into local soccer could be interpreted as a public relations stunt, and it remains to be seen if the investment will pay off for shareholders. It will depend on whether BVB, flush with additional financial resources, can win more matches and generate enough commercial income to pay a dividend. Experience would suggest a generous return is unlikely.
Even if the investment comes good, it won’t be enough to guarantee a rise in Evonik’s stock price. The move into soccer is simply too small to seriously affect a company generating almost €13 billion in annual revenues.
Evonik could do with a boast. The company’s main operations haven’t been performing well in the past year and a half. Excess capacity in several sectors has driven down prices and profit margins, even in its lucrative business selling methionine, a livestock feed additive. Earnings before interest, taxes, depreciation and amortization have dropped 10 percent to about €1.8 billion so far this year, seriously damaging stock prices. Shares have lost a fifth of their value since being listed in April 2013.
Both of Evonik’s majority shareholders – RAG Foundation (67.9 percent) and the private equity and investment firm CVC Capital Partners (17.9 percent) – want to unload some of their stock.
But at least these negative factors are largely accounted for in the market price. The valuation of 16 times the expected earnings for 2014 no longer appears excessively high, while a number of other chemical companies are trading at higher price-earnings ratios. Most industry analysts believe Evonik shares have bottomed out and are likely to rebound.
“The valuation now looks promising and the dividend yield of 4 percent is attractive.”
Martin Evans, an analyst at JP Morgan Cazenove, cites “stabilization on a low base.” Markus Mayer, an analyst at Baader Bank, is more confident. In his most recent report on Evonik, he wrote, “The valuation now looks promising, and the dividend yield of 4 percent is attractive.” Bloomberg reports that about half of the stock analysts following Evonik recommend it, at a rather modest price averaging €30.37.
A €6 billion investment program launched in 2013 will probably be one of the major deciding factors in further market price development. The planned expansion of production capacity for amino acids, such as methionine, is seen as a path to more growth and higher earnings. Yet there’s always the risk that the expansion will create too much capacity and erode prices.
Against that backdrop, the investment in BVB offers little compensation – no matter how well the team plays.
The author is editor on the companies and markets desk at Handelsblatt. Contact: email@example.com