After losing almost 99% of its market value over the last five years, Synthomer‘s (LSE:SYNT) gone from a high-performing FTSE 250 stock to a dirt cheap penny share.
What on earth’s gone wrong here? And is there any chance of a turnaround for this once-mission-critical chemicals business?
What happened to Synthomer?
It was only around five years ago that Synthomer shares were a popular pick among institutional investors. And it’s not hard to understand why, considering the stock had delivered a 2,078% total return between 2009 and 2021.
That’s the equivalent of a 29.2% average annualised return – enough to beat even billionaire investor Warren Buffett’s exceptional track record. And then suddenly it all came crashing down. Why?
Synthomer’s one of the most dramatic cases of self-inflicted value destruction. And while the stock started imploding in 2021, the problem actually originates from a decision made in 2020.
The pandemic triggered a massive supercycle in NBR latex – the raw material needed to make disposable medical gloves, which hospitals, care homes, and consumers rushed to buy as Covid-19 ravaged the world. And as one of the world’s largest producers of this special material, Synthomer entered into a gold rush with both revenues and profits exploding.
But management made one crucial error. They assumed this momentum would last forever. And proceeded to make two expensive and disastrous acquisitions of Omnova Solutions in 2020 and the adhesives division of Eastman Chemical in 2021.
To fund these deals, management saddled the balance sheet with over £1bn in debt, creating a ticking time bomb. Then in 2022, it happened. Lockdowns were lifted, the pandemic subsided, and demand collapsed overnight.
With earnings imploding, the company was forced to repeatedly renegotiate its debt covenants to avoid a breach, and to this day, the debt problem hasn’t been solved.
What now?
In 2026, most investors have written off this business entirely. Yet despite its deep unpopularity, there may actually be a glimmer of hope. Management’s in the midst of refinancing negotiations with its creditors. And to be fair, Synthomer might have an ace up its sleeve to secure relatively favourable terms.
As it turns out, the group’s self-help initiatives are finally starting to bear fruit. Free cash flow generation has returned to positive territory after years of being in the red. And EBITDA has also returned to growth, driven by cost-cutting margin expansion.
This goes to show that Synthomer isn’t a broken business – merely an overleveraged one. And if the current trends continue and creditors’ patience doesn’t run out, there now appears to be a genuine road to recovery available for this penny share.
The bottom line
Synthomer has until 2027 to deliver more material improvement to secure a new deal with creditors.
While management’s ruled out using an equity raise to solve its debt problem, the company ultimately may not have a choice if progress stagnates. And for shareholders, this worst-case scenario could result in their investment getting utterly obliterated by dilution.
With that in mind, buying shares in Synthomer isn’t for the faint hearted. It’s a high-risk turnaround play that could either leave investors laughing or weeping based on what happens over the next eight to 12 months. For now, it’s not a risk I’m willing to take.
