Cytec Industries

At the Q1 results Cytec highlighted that despite a difficult trading environment in certain markets (such as Industrial Materials in Europe), the refocusing of the group following the disposal of Coating Resins is set to bring greater clarity to drive operational performance. With the group restructured into market facing divisions following the integration of Umeco, the opportunity for significant value creation exists, and as the difficult Q112 comparators recede throughout the year and activity picks up, we remain confident that Cytec will deliver quarterly earnings progression for the remainder of the year. Given current market conditions, combined with slightly higher forecast interest and tax, we are easing our FY13 forecast to $4.57/share.

Modest Start To 2013 As Expected
Q1 results reflected the combination of a tough comparator period in Aerospace Materials, weakness in European Industrial markets and timing challenges in In- Process Separation. Despite this, Q1 net sales from continuing operations rose by 26% to $477m, while adjusted earnings from continuing operations were $34.2m, equating to $0.75 per diluted share, a rise of 15%. Due to a slightly weaker outlook in Industrial Materials and higher forecast interest and tax, we are easing our FY13 EPS estimates by 5% to $4.57/share.

Long-Term Strategy Expected To Pay Off
As set out in our recent initiation note, we anticipate that Cytec’s focus on growth markets in which it has a leading position is set to drive returns over the short-, medium-, and long-term. Near term drivers such as Aerospace are augmented by growing use of the group’s composite materials in areas such as automotive and the recovery in the wind energy market, while through In-Process Separation, the group has unique expertise in mining process chemicals. Some short-term volatility may be expected in Industrial Materials due to ongoing economic woes in Europe, we believe that the long-term potential from these markets is significant.

Valuation: Value Opportunity Remains
Given the new divisional structure, softer outlook in industrial markets and increased assumed tax rate, our 2013 sum-of-the-parts (SOTP) eases to $88/share. We remain convinced that a 2014 basis SOTP better reflects the ongoing “new Cytec” and this yields a fair value of $94/share, with further value uplift to come as industrial markets recover and build rates increase in Aerospace.