Recently I have been thinking about diversifying some of my equities into Swiss companies. One of the main reasons for the sudden interest in Swiss equities is due to the strength of the Swiss franc and my desire not to be overly concentrated in US equities. The company I'm currently looking at is called Sika, which specializes in the specialty chemicals industry. This is a brand which I'm quite familiar with as it's widely used as an adhesive and sealant chemical in the construction industry which I'm currently working in. Whenever there are waterproofing and concrete bonding works, the name Sika almost always pops out.
Pls note this is not a buy or sell recommendation and do your own due diligence.
1. Company Overview
Sika is a Swiss company founded in 1910 and its headquarters is in Baar. It operates in over 100 countries with 400+ factories and is a global leader in construction chemicals and industrial bonding. The current CEO is Thomas Hasler who has been with the company since 1989.
2. Industry & Market Analysis
The specialty chemical industry which Sika operates in focuses on high-value, performance-driven chemical solutions tailored for specific applications such as construction chemicals (adhesives, sealants, waterproofing, concrete additives) and industrial manufacturing solutions (automotive, aerospace, renewable energy). The trend towards green construction and building more energy efficient buildings and the demand for EV and battery adhesives are just some of the growth drivers.
It comes with no surprise Asia Pacific dominated the market with a 52.31% share in 2023, driven by robust demand in countries like China and India due to increasing pace of urbanization and infrastructure development. North America and Europe also hold significant shares, with ongoing investments in infrastructure and industrial development. (Fortune Business Insights)
Based on Fortune Business Insights, the specialty chemicals market was valued at approximately USD 627.7 billion in 2023, with projections indicating growth to USD 721.5 billion in 2024 and reaching USD 1,063.4 billion by 2032, reflecting a CAGR of 5.0% during the forecast period.
3. Business Model & Strategy
Sika business operations is divided into 2 main segments: 1) Construction (84% of revenue) and 2) Automotive and Industry (16% of revenue). Some of the construction solutions Sika provides in the construction industry include concrete admixtures for strength and durability enhancement, waterproofing systems, repair and reinforcement of aging infrastructures. Sika products are also widely used in the automotive, aerospace and manufacturing sectors.
Over the years, Sika has strategically acquired several companies to improve its competitiveness. For example, it acquired Modern Waterproofing Group in 2020 which is a leading Egyptian company specializing in water proofing works to enhance its position in the Middle East and North African region. It also acquired MBCC Group and Kwik Bond Polymers in 2023 and 2024 respectively. MBCC is a leading global supplier of construction chemicals which further expanded Sika's portfolio with innovative, sustainable, and digital solutions across various sectors, including buildings, infrastructure, and underground construction. Kwik is a manufacturer of polymer systems for the refurbishment of concrete infrastructure in the USA. These strategic initiatives and acquisitions demonstrate Sika's commitment to growth, innovation, and market expansion, reinforcing its position as a global leader in the construction chemicals industry.
In summary, the company adopts a 5 pillar strategy for expansion namely 1) Market penetration, 2) Innovation, 3) Acquisitions, 4) Operational efficiency and 5) Sustainability.
4. Financial Analysis
Sika currently has a market cap of $35 billion CHF and the table below shows some of the key financial metrics. It can be observed that the revenue growth and profitability margins seem to be slowing down. This could be due to weakness in the Chinese construction market (China is a significant market, contributing about 11.6% to the company’s net sales), currency fluctuations of the Swiss franc against other currencies and a challenging macroeconomic environment.
In 2024, it achieved $11.76 billion in sales (an increase in 4.7%) and an increase of 17.4% in net profit to $1247.6million CHF. The company announced it achieved sales of $2678 million CHF in Q1 as compared to $2648 million CHF in the previous year. The Americas and EMEA region saw organic growth of 4.9% and 0.7% respectively while Asia Pacific remained flat. Sales increase is expected to be in the region of 3-6% for fiscal 2025.
In the last 12 months, operating cash flow was 1.74 billion and capital expenditures was 331.10 million, giving a free cash flow of 1.41 billion. Cash and cash equivalents currently stands at 712.9 million CHF.
Sika does pay a dividend, and the current yield is 1.65% and the payout ratio is 21.25% which suggests there is ample room to increase payout in the future. 2025 payout is 3.6CHF which is an increase of 9.1% as compared to 2024.
5. Investment Thesis
Sika is a household name in the construction industry and most professionals working in this industry would have heard of it. It's truly a market leader in the specialty chemical industry and it has strengthened its competitiveness over the years through strategic acquisitions as highlighted above.
Urbanization and the rise of mega infrastructure projects are set to propel global construction demand. Speaking of mega infrastructure projects, look no further than home soil, where Changi Airport T5 is set to commence construction works after a 2-year hiatus. India is also building its first bullet train project spanning 508 km between Mumbai and Ahmedabad. The large demand for infrastructure in India and SEA will soften the blow caused by the slowdown in China’s construction market.
Additionally, the growing need for data centers—fueled by advancements in AI and cloud computing—will further accelerate the demand for construction. For example, the $110 billion USD Stargate initiative is a massive investment opportunity.
The construction industry's strong emphasis on sustainability, cost efficiency, durability and performance has created a huge opportunity for Sika innovative products. For example, concrete is a material that has a large carbon footprint. Sika has produced several products which reduce CO2 emissions while increasing the material strength and durability.
Sika is a high-quality, globally diversified company with strong innovation and resilience in construction markets. Its long-term growth prospects in sustainable construction also remain compelling.
6. Risks & Challenges
One of the key risks the company faces is the price of raw materials. Specialty chemicals rely on petrochemicals, resins, and polymers which are highly dependent on oil prices. The prices of raw materials could be further exacerbated by supply chain disruptions.
The construction and automotive sectors which Sika is heavily dependent on are also highly sensitive to economic cyclicality. In the latest outlook highlighted in Sika media and investor presentation, the company did highlight the continued challenging market environment in the European construction and automotive & industry. It also highlighted the challenging Chinese construction markets as consumer confidence remains low.
7. Conclusion & Recommendation
I do owe shares in Sika with an average price of 234.2 CHF. Its currently down by about 7% and I will be closely monitoring the performance of the company in the next few quarters. But I believe its a good company with strong financial fundamentals and its a global leader in the specialty chemicals industry so I will probably continue to average down
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