A penny share I want to take a closer look at is Synthomer (LSE: SYNT). I’ve noticed that the shares have been on a downward trajectory for some time, but analysts from Berenberg Bank are backing the business to recover and Barclays analysts also believe the shares could rise well above current levels.
Polymers
Synthomer is a speciality chemicals company. It’s one of the world’s largest producers of aqueous polymers, which are used in latex gloves, building products, carpets, paper, adhesives and more.
It’s worth remembering that a penny share is one that trades for less than £1. As I write, Synthomer shares are priced at 61p. At this time last year, they were as much as 182p, which means a 66% decrease over a 12-month period.
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Recent issues and analyst forecasts
Synthomer saw its earnings and share price flying high during the pandemic. This was because of the surge in demand for latex gloves.
During this fruitful period, Synthomer overstretched itself, in my opinion. It acquired other businesses to boost its offering and in its attempt to grow. The issue here was that demand fell off a cliff once the pandemic receded so the business began to struggle. On top of that, debt levels began to spiral out of control. Debt has become even more of a challenge of late due to the current high interest rates we’re seeing. Rising rates can make existing debt costlier to service, which takes a bite out of revenue and profits. All of this has led to Synthomer falling into penny share territory.
Despite the doom and gloom, City analysts are expecting a turnaround. This is in part due to the firm’s decision to restructure the business, reduce operations via strategic disposals and try to tackle its debt problems and fix its balance sheet. It believes it can get back to profit and analysts agree. In fact, they’re expecting the business to get back into the black in 2024 after reporting losses in the past year. Furthermore, analysts also believe a dividend could be on the cards, with a forecast dividend yield of 5% in 2024.
A share I’d buy with caution
Synthomer’s recent losses and debt issues are a concern. The current restructuring seems to have some analysts convinced, although the share price doesn’t yet reflect this optimism. However, I do understand that forecasts don’t always come to fruition.
It’s still a dominant player in its market. One of its core products is nitrile, the chemical used in latex gloves. Although the pandemic ending caused a sharp decline in demand, general demand for latex gloves shouldn’t go away for a long time due to their essential nature in the healthcare sector. This should help boost the business’s earnings in the future. In addition to this, the diverse nature of the chemicals it produces and their many applications should help boost earnings too.
I’d be willing to add a small number of the shares to my holdings when I next have some cash to invest. I’m expecting some short-term pain and wouldn’t be surprised to see the share price fall before eventually heading back towards higher levels seen previously. This type of volatility isn’t uncommon with penny shares.
