• AXTA attended Vertical Research Partners’ 2017 Basic Materials Conference. We hosted a fireside chat with CFO Robert Bryant on 14 June. Against the backdrop of a rapidly consolidating global coatings industry, perhaps the most interesting commentary related to M&A. At a high level, the company’s pipeline was described as “very active”. More salient though was the notion that Axalta appears quite open to potential for a “transformational” deal, although management also cited plenty of headroom to grow in coatings verticals where the company competes currently. With Akzo having fended off PPG, at least until December 2017, we believe conventional wisdom among investors in recent months has been that Axalta could become a target. Indeed, an Akzo-Axalta tie-up could work in our view, despite market concentration in auto refinish coatings. However, we are now beginning to wonder whether Axalta might wish to be the acquirer, perhaps following the planned separation of Akzo’s chemical business. Akzo’s coatings platform (ex chemicals) is roughly 50% larger than Axalta in terms of EBITDA, so such a combination would necessitate the issuance of Axalta equity in our view. In terms of other possibilities, we note that Berkshire Hathaway owns 9.6% of Axalta shares as well as architectural coatings producer Benjamin Moore.

• Key Takeaways: (1) Even though leverage has increased (currently ~3.1x) due to the acquisition of Valspar’s Wood Coatings business, the company is comfortable taking on additional leverage for bolt-on and/or transformational acquisitions; (2) in the latter scenario, Axalta would be comfortable taking net debt to...

• We rate AXTA shares Hold with a price target of $32. Our target suggests shares are 4% overvalued (AXTA shares do not currently pay a dividend). As a reminder, our valuation of AXTA is based on an average of two methodologies: DCF analysis and a relative P/E framework. Our DCF analysis suggests a warranted stock price of $38. Using our relative P/E framework wherein we apply a 10% premium to the S&P500 multiple, we calculate warranted value of $26 per AXTA share.

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