Sika

Fabulous sales and earnings growth with specialty chemicals

In early September 2011, I started my apprenticeship at Deutsche Bahn in Munich. Around that time, I probably first came into contact with sealants from the Swiss manufacturer Sika. Toward the end of 2011, I then bought my first own stocks, though not Sika, but Coca-Cola and ExxonMobil. Both stocks served their purpose - but neither came even remotely close to delivering a performance like the specialty chemicals group Sika. The stock has gained over 1,100 percent since then. I could have achieved an equally decent return with the German software company Atoss - whose time tracking tool I worked with from 2015 on.

Well, you shouldn't mourn missed opportunities. So I can only repeat it: go through the world with your eyes open and you'll find great investment opportunities everywhere. That's why today we're taking a look at whether an investment in Sika could still be worthwhile.

The history and business model of Sika AG

The history of today's chemicals group has its origins in 1872, when Kaspar Winkler was born in Thüringen in Vorarlberg, a small municipality in Austria. There he grew up with his seven siblings in modest circumstances. As was common at the time, children were sent to work early to earn money for the family. So at the age of nine, Kaspar was sent to a farmer, where he worked as a cowherd. The work was hard and dangerous - once there was an accident, something got into his eye, and from then on he had to live with a glass eye. A little later, he completed a plasterer apprenticeship in Bregenz and gained his first experience in the construction industry. At the age of 17, he emigrated to Zurich, a city that was in the middle of a strong growth phase. Hard-working laborers like Kaspar were in demand everywhere. Through his talent and his thirst for knowledge, he quickly worked his way up to site manager and in 1895 became the manager of a granite quarry in Ticino in southern Switzerland.

Around the turn of the century, Kaspar returned to Zurich, took the plunge into self-employment and founded his first company, called Kaspar Winkler Granitgeschäft. He experimented with various construction chemicals and developed a product for cleaning granite stones. Unfortunately, business was very sluggish, and he closed it after just 3 years. While he took a job again with the Schweizerische Granitwerke, he kept tinkering nonstop on new products on the side. At that time, he had already hired his own chemist to support him. Together they experimented with Silicon and potassium (Kalium) mixtures and developed from them an additive that was stirred in when mixing mortar and concrete. This new agent offered effective protection against water and moisture. Once again he founded a company, this time called Kaspar Winkler & Co., and started marketing his product, which he named SIKA-1. Unfortunately, this product didn't become a quick success either. In the early years, his company was only in the red. The start of World War I also caused considerable problems, as raw material prices rose sharply. Still, Kaspar was convinced of his product, and the customers who were already using it were happy too.

The breakthrough only came with a large order from the Swiss Federal Railways. Between 1918 and 1922, they had to replaster and waterproof a total of 67 tunnels on the Gotthard line between Lucerne and Chiasso, with a total vault area of 59,000 m². The existing tunnels were dripping from every hole - with steam locomotives that didn't matter much, but with the upcoming electrification of rail operations it did. After some tests, they chose three products from the SIKA line, and the order volume of a fabulous 450,000 Swiss francs fueled the young company's growth. Besides the money, which it could undoubtedly put to good use, it was above all the good reference from the railway that significantly boosted demand. Due to the product's success, the company also changed its name to Sika. The first branches abroad followed, along with a steady expansion of the product range. Today, it's impossible to imagine the chemicals industry without Sika AG. It mainly focuses on products and systems for bonding, sealing, damping, reinforcing and protecting, which are used in the construction and automotive industries. In total, it employs 25,000 people in over 300 factories in 100 countries around the world.

How could Sika AG develop in the future?

First, I'd like to briefly sum up the business model of the construction chemicals pro once more. Sika AG is represented worldwide through its subsidiaries and serves a growing customer base from the construction, automotive and manufacturing industries. As described above, Sika develops, produces and sells chemicals for sealing, bonding, damping, protecting and reinforcing. Sika is valued for its high quality and its reliable, innovative, sustainable and durable solutions. Besides the Sika umbrella brand, it has nearly 1,000 other Sika product brands, such as SikaBond, Sikaflex, Sarnafil, Schönox or Pulastic.

No question, the business model doesn't exactly sound exciting, but it's highly profitable. With that in mind, let's now take a look at the data from the most recently published financial report (Half-Year Report 2021). Total sales for the period from the beginning of January to the end of June 2021 came to 4.4 billion Swiss francs. That's 23.5 percent more, compared to the prior year. Thanks to efficiency-boosting measures and additional synergy effects from several acquisitions, Sika was able to increase its operating profit by a near-record 67.2 percent to 685.9 million Swiss francs. Per share, this corresponds to undiluted earnings of CHF 3.49 - in the prior-year half it was still CHF 1.94. So no wonder the stock has risen so much ...

To keep growing in the future, Sika invests a lot of money in research and innovation. Around 1,100 employees worldwide work on this goal alone, day in, day out. So it's no wonder that a whole 508 new patents have been filed since 2015 alone. Special attention is paid to sustainable product solutions that help reduce the CO₂ footprint. Sika is also a leader in 3D concrete printing technology - a market that should still offer considerable growth potential in the future.

Apart from innovation, Sika also wants to keep growing through sensible acquisitions. This year alone, it announced seven takeovers. That makes it possible to secure new sales channels, complementary technologies and improved market access. No question, an acquisition always carries the risk of overreaching and running up costs - still, I'm confident that Sika knows its craft inside out and knows exactly what it's doing. All in all, I'm very optimistic about the future of the specialty chemicals group.

What about the dividend?

Since its IPO in 2000, the chemicals company Sika has been letting its shareholders share in its profits in the form of dividends. However, it hasn't been able to increase the dividend every year. In 2011, it even had to cut the dividend slightly. Since then, though, the group has managed to raise its payout year after year. In fact, it's setting a decent pace - the average dividend growth rate over the last 10 years is 13.5 percent - and over the last 5 years even 15.6 percent. With figures like that, you can easily accept the current dividend yield of 0.8 percent. Last but not least, the payout ratio of 38.0 percent also signals a green light for future dividend increases.

Conclusion:
The Swiss group Sika undoubtedly knows specialty chemicals inside out. In many areas, it's among the top market leaders in the industry. I'm very confident that Sika will keep its customers and shareholders happy in the future too - which is why I can only recommend that long-term investors take a closer look at this stock.