Covestro AG, the German plastics business spun out of Bayer AG (BAYRY) , jumped more than 6% on Tuesday after smashing third quarter revenues and earnings expectations and announcing a €1.5 billion ($1.76 billion) share buyback.
Covestro posted adjusted Ebitda of €862 million, up 50.2% year-on-year, on sales of €3.5 billion, up 16.9%, as demand for its key polyurethane products outstripped supply pushing prices almost 30% higher year-on-year. The EBITDA result was 7.3% ahead of analyst consensus.
Covestro shares were among the best performers on the German market on Tuesday, Oct. 24, climbing to an all-time high of over €77.07 in early trading before dropping back to €76.40, up €4.28 or about 6%.
"We are currently enjoying tremendous growth momentum and we are delivering records in revenues, profitability and cash generation," said CEO Patrick Thomas. "The extraordinary cash generation provides us, earlier than originally expected, with the opportunity to return significant amounts of cash to our shareholders while preserving the ability to consider bolt-on acquisition opportunities."
Covestro had previously said that it would retain cash for acquisitions and had suggested that a share buyback would not be considered until 2019. The share buyback, which could account for as much as 10% of Covestro's stock, is expected to commence in the fourth quarter of this year and will run for almost two years.
Covestro's strength is a boon for Bayer, which is selling down its stake in the unit to help fund its planned $66 billion purchase of seeds and pesticides maker Monsanto Co. (MON) . Bayer owns 31.5% of Covestro, while Bayer's pension fund owns a further 8.9% stake. Bayer, which spun Covestro off in 2015, sold a 9.4% stake in the business in September for €1.2 billion and reiterated its plan to eventually exit its holding.
"We see Covestro as continuing to benefit from high prices," wrote Goldman Sachs analysts including Stephen Benson. "We expect investor focus to be centered around the sustainability of these high prices." Goldman Sachs has a neutral rating on Covestro and a price target of €65 per share.
Covestro maintained its vague guidance for 2017 of "considerably higher" EBITDA than the previous year, but said that the strong results had prompted a review of its free-cash-flow target of €5 billion by year-end 2021.
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