Morgan Stanley sees Lanxess stock boosted by disposal strategy and FCF focus

On Thursday, Morgan Stanley upgraded Lanxess AG (ETR:LXSG) (LXS:GR) (OTC: LNXSF) stock from Underweight to Overweight, significantly raising the price target to EUR 37.00 from EUR 23.00. The financial institution is optimistic about Lanxess' strategic focus on disposal and free cash flow (FCF), which is expected to reduce the company's net debt (ND) from four times to approximately 2.7 times.

The analyst from Morgan Stanley highlighted that the current share price of Lanxess, which hovers around EUR 22, seemingly anticipates the possibility of a rights issue. However, the firm anticipates that the company's deleveraging process will mitigate concerns over a potential equity raise and the associated negative impact on the stock's value. Furthermore, the analyst suggested that the market undervalues Lanxess' Envalior unit, which should be priced at a minimum of EUR 3 to EUR 6 per share.

The analysis conducted by Morgan Stanley on Lanxess' Envalior business, particularly its Nylon 6 segment, suggests that it could generate around EUR 450 million in EBITDA. Applying a range of enterprise value to EBITDA multiples, which includes the average multiples of peers and the multiples from initial transactions, Envalior's valuation could add approximately EUR 3.7 per share to Lanxess. Additionally, the repayment of a EUR 200 million bond could further increase value to Lanxess' shareholders by EUR 2 per share.

Looking ahead, Lanxess is positioned to potentially benefit from the anticipated decline in natural gas prices in the second half of 2025. Morgan Stanley's forecasts predict that natural gas prices could fall to around $6.5 per mmbtu. This reduction in energy costs is expected to favor Lanxess' Advanced Intermediates segment and its primarily German manufacturing customer base, which is heavily reliant on energy.

In other recent news, Lanxess AG has been the subject of an updated financial model by Deutsche Bank, leading to an increase in the bank's price target for the company's shares from €27.00 to €28.00. This adjustment was triggered by a positive outlook on Lanxess AG's EBITDA for 2024, which Deutsche Bank now forecasts to be €612 million, a 9% increase from previous estimates.

This places it at the high end of Lanxess AG's own guidance range. The updated figures are influenced by significant cost savings and the elimination of inventory reduction previously estimated at €560 million.

Lanxess AG had earlier indicated a potential €40 million impact from cost savings and an additional €100 million from the absence of inventory reduction. The company has reiterated its outlook for 2024, predicting an adjusted EBITDA growth of 10% to 20% year-over-year, which suggests an EBITDA range between €563 million and €614 million.

In addition to these developments, Lanxess AG's management has projected that the third quarter of 2024's EBITDA will be close to or higher than the second quarter's reported EBITDA of €181 million. Deutsche Bank's estimate for this period stands at €178 million, an upward revision from their previous forecast of €168 million. These are the recent developments concerning Lanxess AG's financial outlook.

InvestingPro Insights

Recent data from InvestingPro provides a deeper dive into Lanxess AG's financial health and market performance. With a market capitalization of $2.33 billion, the company's valuation reflects certain challenges, including a negative P/E ratio of -2.52, indicating that the company has been unprofitable over the last twelve months. Nevertheless, the InvestingPro Tips suggest a silver lining, with net income expected to grow this year and a valuation that implies a strong free cash flow yield. This aligns with Morgan Stanley's optimistic view on the company's strategic focus on disposal and free cash flow.

Moreover, InvestingPro highlights Lanxess' commitment to its shareholders, having maintained dividend payments for 18 consecutive years. While the stock price movements have been quite volatile, analysts predict the company will turn profitable this year. For investors seeking more in-depth analysis, there are additional tips available on InvestingPro, which delve into the nuances of Lanxess' financial metrics and future prospects.

It is also noteworthy that the InvestingPro Fair Value estimation for Lanxess stands at $30.64, which suggests that the current stock price may be undervalued. This assessment could provide further confidence to investors buoyed by Morgan Stanley's upgrade and increased price target.

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