The FTSE 250 stock that could be the next Rolls-Royce

Synthomer shares are up 50% this week after a trading update. Stephen Wright thinks the FTSE 250 company could be 2024’s big winner.

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The Rolls-Royce (LSE:RR) share price has been the big FTSE 100 story of the last couple of years. But I think there’s a FTSE 250 stock that could be the next big winner.

Shares in Synthomer (LSE:SYNT) are up around 50% since the start of the week. And I think this could be the beginning of a big turnaround for the company.

Rolls-Royce

The story with Rolls-Royce is relatively straightforward. During the pandemic, travel restrictions meant demand for engines and servicing plummeted, causing the company’s revenues to evaporate. 

In order to stay afloat, the business had to take on debt, issue shares, and cut costs. And this was disastrous for the stock, which fell around 88%.

Since the end of the pandemic though, the business has come roaring back. Increased travel demand has the company generating cash again and using this to repair its balance sheet

As a result, the Rolls-Royce share price has climbed over 300% during the last 18 months. While there might still be more to come, I think a different stock looks like the big winner of 2024.

Synthomer

Synthomer has essentially followed the opposite path. The pandemic boosted demand for one of the company’s products (nitrile – used in surgical gloves) leading to higher revenues and profits.

As a consequence, Synthomer shares gained around 150% between April 2020 and August 2021. Since then, however, things have been going the other way quickly.

Higher purchasing during the pandemic has given way to excess inventory levels in end markets. This has led to a steep fall in demand, resulting in lower revenues and profits. 

In order to service the debt on its balance sheet, Synthomer has been cutting costs and issuing shares. And this has caused the stock to fall 95% between August 2021 and January 2024.

The start of a turnaround?

Synthomer released its 2023 results in the latest week. While there’s a long way to go, there were some clear positives for investors – which is why the share price has been rallying.

The company’s initiatives are starting to have tangible effects on the business. Net debt fell from £1.02bn to around £500m and free cash flow improved from £69m to £86m.

Declining revenues, lower margins, and negative earnings indicate how far there is to go though. So there’s still a lot of risk for investors, especially with no sign of inventory levels coming down.

Nonetheless, analysts are expecting £63m in pre-tax profits by 2025, which would imply a price-to-earnings (P/E) ratio of 5.5 at today’s prices. If this happens, the stock will look very cheap.

The next big winner?

There’s a big difference between Synthomer’s situation and what’s happened with Rolls-Royce. Essentially, there’s currently no sign of inventory levels normalising for the chemicals company.

Rolls-Royce was able to use a recovery in the travel sector to boost sales and repair its balance sheet. Synthomer is having to try and achieve the same thing without a corresponding surge in demand.

That makes the stock risky, but I think the company has a decent chance to make it. And if it does, the returns for investors could be huge.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc and Synthomer Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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