October 24, 2017 / 9:44 AM / 5 months ago

UPDATE 1-Foam chemical sales cushion Covestro profit, spur buybacks

* To buy back 1.5 bln euros or 10 pct of capital

* Q3 Adj EBITDA jumps 50 pct to 862 mln euros

* Shares jump as much as 7.3 pct to record (Adds CEO quotes, industry background, shares)

By Ludwig Burger

FRANKFURT, Oct 24 (Reuters) - German chemicals group Covestro said it would repurchase shares worth 1.5 billion euros ($1.8 billion) on Tuesday and flagged further buybacks as its foam chemicals business generated more cash than forecast.

Covestro, which was spun off from Bayer, said it would “almost certainly” ask permission at its next annual general meeting for another buyback of the same size as the planned repurchase will use up its allowance.

“We were looking at ever higher-than-expected margins, compared to were we about six months ago. That was leading to a lot of free operating cash flow generation, up 24 percent year on year,” Chief Executive Patrick Thomas said.

With prices of prospective bid targets “way too high”, only bolt-on deals were on the cards and there was no need to further ramp up investment spending on plants and equipment, he added.

Covestro in June said it was eyeing 5 billion euros in total operating cash flow after investments over the next five years but Thomas said on Tuesday that this bar would be raised later this year or early in 2018.

The company’s shares jumped as much as 7.3 percent to a record high and were trading 5.8 percent higher at 0840 GMT while the STOXX Europe 600 Chemicals was little changed.

“This is the first major buyback by a European chemical company in many years and should be taken well by the market,” said Barclays analyst Sebastian Satz.

Quarterly earnings before interest, taxes, depreciation and amortisation (EBITDA) jumped 50 percent to 862 million euros, above the 790 million euros expected on average in a Reuters poll of analysts.

Competitors in chemicals for foams that go into mattresses, car seats or heat insulation have suffered a number of technical setbacks amid growing demand, which has boosted prices.

Demand for Covestro’s lightweight automotive parts such as sunroofs made out of transparent plastics or structural plastic parts that replace metal, were growing at a “tremendous rate” as battery-powered vehicles needed to shed weight, CEO Thomas said.

“Over the last six months the world just seems to be on a move towards e-mobility,” he told Reuters, also citing strong demand for building insulation in North America.

Bayer has been selling down its stake and now directly owns only about 25 percent, with an additional 8.9 percent held by Bayer’s pension trust. ($1 = 0.8503 euros) (additional reporting by Christoph Steitz; Editing by Biju Dwarakanath and Alexander Smith)

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