Air Products and Chemicals: Eyes on International Assets to be Divested

• APD attended Vertical Research Partners’ 2017 Basic Materials Conference. We hosted a fireside chat with CFO Scott Crocco and VP of Investor Relations Simon Moore on 14 June. Topic number one for APD shares remains deployment of excess capital accumulated following the separation of Versum (VSM) and divestiture of PMD to Evonik (net debt was $551mn or 0.2x EBITDA as of 31 March). One message: be patient. We view this approach as entirely reasonable and believe that most investors will as well for two reasons: (1) trust in CEO Seifi Ghasemi as a skilled steward of capital; and (2) public market multiples are high and private market multiples are at record highs, so what’s the rush? Of course, it helps to have a catalyst in the form of a motivated seller. Air Products signaled interest in assets that are likely to be divested for anti-trust reasons as peers Praxair and Linde combine via a merger of equals (click here). With regard to the US market, we believe regulators would permit neither Air Products, nor Air Liquide to acquire assets to be cast off. However, we do expect Air Products to pursue assets that may become available in other markets, such as Germany, Brazil, Scandinavia, India and Canada. Hypothetically, if APD were to acquire assets that generated $250-350mn of EBITDA in the aggregate, that could result in EPS accretion of $0.26-0.37 or +4-6% and pro forma balance sheet leverage of 1.0-1.6x EBITDA as outlined in Table 1.

• Key Takeaways: (1) management intends to be patient when it comes to deploying excess cash over the next few years; (2) the company flagged ~$1bn in revenues to be divested from the Praxair/Linde merger that they could seek to acquire in Brazil, Germany, Scandinavia and India; (3) outside of these cast-off  assets, other acquisition targets are…

• We rate shares of APD Sell. Our PT of $134 suggests limited potential for upside, including a dividend yield of 2.7%. We value APD based on an average of our DCF analysis and a relative P/E-based framework. Our DCF analysis suggests a warranted stock price of $125 and includes a weighted-average cost of capital (WACC) estimate of 8.0% and a terminal growth rate of 2.5%. Our relative P/E multiple applies a 30% premium to the S&P 500 multiple and implies a stock price of $143. At current multiples of 22.2x our CY17 EPS estimate of $6.34 and 11.4x our CY17 estimate of EBITDA, we maintain a relatively cautious posture as we believe that APD’s multiples already reflect substantial margin improvement and most of the company’s latent earnings power resident in an under-leveraged balance sheet. We estimate the latter at +12-18% in terms of our F2018 EPS estimate of $6.55. 

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