Trinseo PLC: Poor Margins And Lacking Growth Make Downside Risk Large

Investment Rundown

Trinseo PLC (NYSE:TSE) hasn't grown that impressively over the last decade. The revenue CAGR is negative 1.73% in the last 10 years, and with quite poor margins, the business doesn't look that appealing to be investing in right now to be completely honest. I find the lacking growth and poor margins to be a good reason for TSE to continue trading at a low multiple.

There might be a long time until we see them growing into a business worthy of a p/e of 14 or a p/s of 1.17, which is what the materials sector is valued at. Sales were down a significant amount in Q1 to 2023 and for the coming quarters, I don't see a strong case for a catalyst happening. That means the downside risk seems quite large here. I think exiting a position now and only perhaps entering one when there have been several consecutive quarters with positive EPS posted makes sense. For now, TSE seems too risky, and I am rating them a sell.

Company Segments

Trinseo focuses on manufacturing and selling plastics and latex binders in a variety of different markets all around the world. The recent earnings report showed continued challenges for the business as net sales dropped nearly 40% to under $1 billion. Throughout all of the segments in the company, the revenues were down. The company has divided the business into 6 different segments which are the following, Engineered Materials, Latex Binders, Base Plastics, Polystyrene, Feedstocks, and lastly Americas Styrenics.

The segment generating the largest amount of revenue right now is Plastic Solutions. Here revenues reached $290 million in Q1 2023 but still faced a lot of difficulties. The significant volume decrease as demand lessened resulted in disappointing results. The primary markets with lower demand were "building and construction" but also "consumer durable applications". The shutdown of one of the polycarbonate lines didn't exactly add anything positive either. But the management noted they did manage to keep some margins in the quarter, but it's not nearly enough to make for a buy case with TSE.

Markets They Are In

As we have discussed here, TSE serves a variety of different markets and keeps a diversified set of revenue mixes.

For Q1 in 2023, the majority of the revenues came from Europe, which is also where the largest amount of volumes was lost when compared to Q1 of 2022, 22% less. The decrease in building and construction in the European market helped contribute to this result. But some might see TSE still as a potential buy as the rebuilding of Ukraine after the war could provide plenty of opportunities to grow revenues.

I find it important however now for TSE to set themselves up the best they can to either upgrade and invest into more production capabilities, but with 10x more debt than cash right now I think they will be stuck spending capital paying that down, rather than making significant investments.

Earnings Highlights

As discussed here already, starting in 2023 TSE was faced with significant challenges, that seem to have persisted from Q4 2022. The miss they had in Q4 2022 came on the back of lower demand, and that lower demand persisted in Q1 2022 as well.

On an adjusted basis, the EPS for TSE is positive, but the difference is quite large and doesn't bring any confidence to me that TSE is trading based on fundamentals. Rather, the business faced a significant setback and now needs to quickly return to previous performances to regain the market's trust. For Q2 2023 an important note to watch out for will be the margins. In Q1 2022 the EBITDA margins were above 8% and for Q1 2023 they went far lower to under 3%. That of course impacted the final results as no larger amount of revenues or volumes helped offset it.

The management has taken steps however to rectify their financial situation and cutting the dividend significantly helped them have a better financial position and less leverage in my view. I think it will be a long time until we see the dividend raised again. In 2022 the company spent nearly $60 million in dividends and $155 million in repurchasing shares. That will most likely stop or significantly decrease in 2023. I think investors who are interested in TSE are looking at 2025 and beyond perhaps as when TSE can return to its former self. But that leaves a lot of dead time where capital might be better held elsewhere.

Risks

In 2023, TSE faces three significant challenges that warrant attention. Firstly, the soaring energy costs in Europe could impact the company's operations and overall profitability, necessitating efficient management of resources to mitigate potential adverse effects.

Secondly, closely monitoring China's recovery from economic fluctuations becomes crucial. The pace at which the Chinese market bounces back will undoubtedly influence TSE's global business outlook, as China plays a pivotal role in the company's supply chain and customer base.

Lastly, the pace of destocking by TSE's customers will be a crucial factor in determining future demand and order sizes. Striking a delicate balance between maintaining sufficient inventory levels and meeting customers' needs becomes essential to navigate potential fluctuations in demand.

Final Words

I am right now viewing TSE as a very risky investment given the significant decline in volumes the company experienced in both Q4 2022 and Q1 2023. I am not confident they will see a quick recovery, and they are bleeding money as a result. The dividend got cut and buybacks are likely to slow down, which were some of the large benefits that came with investing into TSE previously in 2022. I am rating TSE a sell right now, and I want to see several quarters of positive EPS posted before considering a higher rating.