Synthomer (LSE:SYNT) has recently found itself tumbling into penny share territory, after falling from a 52-week high of 162.4p down to around 55p today. That’s a painful 65% pullback dragging its market-cap below the £100m threshold.
What happened? And with the stock now 65% cheaper, is this secretly a terrific buying opportunity for growth investors?
Investigating the fall
As a quick crash course, Synthomer’s a global chemicals producer specialising in high- performance, water-based polymers.
It has a bit of a niche portfolio of products. But these polymers nonetheless play a crucial role across a wide variety of modern applications. This includes masonry coatings and waterproof membranes for the construction sector, industrial adhesives for the packaging and logistics industry, and protective chemical-resistant gloves for laboratories and hospitals.
Needless to say, its products are important, with demand still largely robust. So what’s going on?
The problem actually stems back to 2020. With demand for medical gloves skyrocketing during the pandemic, management loaded up the balance sheet with debt to acquire Omnova Solutions to rapidly expand its medical glove production capacity.
The problem is, Synthomer massively overpaid. And when demand collapsed from pandemic peaks, glove revenues quickly dried up, leaving the company with a mountain of debt that continues to be problematic today.
In fact, Synthomer has already had to negotiate with its banking syndicate to not only temporarily increase debt covenants but also extend the increase until the end of 2026.
Credit rating agencies have subsequently lowered their rating, which was already in ‘junk bond’ territory. And with additional cash flow uncertainty due to US tariffs, it isn’t surprising to see the now-penny share take a beating.
A distressed turnaround play?
Despite the financial troubles Synthomer finds itself in, the underlying business remains strategically sound with long-term structural demand for its products intact. As such, if management can get a good grip on its finances and bring debt under control, the company could be ripe for a turnaround.
Several non-core asset sales have already been executed to help raise capital and pay down debts. Meanwhile, the firm’s also executing several self-help initiatives to boost internal efficiency and generate more cash flow.
Furthermore, the group’s also set to benefit from the wider macroeconomic tailwinds of interest rate cuts. Beyond expanding its refinancing options, lower interest rates are also likely to spark more construction activity, driving up demand for a number of polymer products.
So with all that in mind, where does this leave investors today?
The bottom line
While Synthomer’s facing a bit of a debt crisis, the company isn’t doomed just yet. With good execution and a bit of restructuring, Synthomer seems capable of delivering a solid turnaround.
But sadly, none of this is guaranteed. And with the clock ticking on its covenant extensions, continued subdued demand from its core end-markets could see the penny share tumble even further.
That’s why, until some solid recovery progress emerges, I’m not rushing to invest in this penny stock today. Luckily, there are plenty of other turnaround opportunities to explore in this area of the stock market.
