Huntsman: Analyst Positive Despite Headwinds After Hurricane Harvey

Huntsman Corporation (HUN: Buy, $34 PT) 
Hiking Earnings and Target on PU Strength
• HUN shares have some legs in our view. Huntsman’s positive pre-release this morning suggest to us that fundamental momentum in Polyurethanes was stronger than expected on a pre-Harvey basis. Now with Harvey having turbo-charged petrochemical prices on a broad-scale, we see Huntsman as well positioned to capitalize in 4Q17 and perhaps beyond. This should dovetail nicely into the company’s MOE with Clariant, which we expect to close in January 2018. In this context, we affirm our Buy rating and raise our price target by $3 to $34, supported by three factors: (1) higher projected earnings (see below); (2) a higher share price for 75%-owned VNTR; and (3) and an increase in the value of comparable companies in our sum-of-the-parts (SOTP) model. This implies potential for total return of 21% including a dividend yield of 1.8%.
• Profitability looks ripe on apples-apples basis. We estimate comparable 2Q17 EBITDA, ex the Venator business at $299mn, i.e. excluding $114mn in legacy Pigments segment EBITDA related to the IPO of Venator (VNTR). Given this morning’s headlines, we increase our above-consensus 3Q17 EBITDA by… 
• MDI outlook: stronger for longer. Globally, the supply of MDI remains tight, resulting in higher prices through most markets. This is the result of improved demand in China as well as hangovers from earlier outages in Europe. In the US, already tight market conditions were exacerbated by Harvey-related outages. For example, Covestro had shutdown MDI production at both its Baytown, TX and Channelview, TX facilities (together 22% of US capacity and 4% of global capacity), while DowDuPont declared force majeure at Freeport, TX (23% of US capacity and 4% of global capacity).  Covestro has… 
• HuntsmanClariant offers premium growth at a discount. Relative to the “old” Huntsman, the company’s transitional portfolio, post-VNTR and prior to the company’s pending merger of equals (MOE) with Clariant, features slightly higher growth and operating margins on a normalized basis as well as lower financial leverage, diminished pension obligations, a lower tax rate, a higher FCF yield, and, for better or worse somewhat less exposure to Europe.  Looking ahead, we see… 
• Background: Huntsman raises guidance despite stiff Harvey headwinds. In a press release issued this morning (pre-open) Huntsman indicated that the company now expects 3Q17 earnings to fare better than 2Q17 pro forma results, despite an estimated headwind of $35-40mn associated with Hurricane Harvey. Better than expected results from Polyurethanes is a primary reason for the strength. Despite widespread flooding in Texas… 
• HUN remains one of our top picks along with DWDP, EMN and GRA. Our $34 target for HUN is based on our sum-of-the-parts (SOTP) analysis, wherein we value each of the individual businesses within Huntsman and Clariant based on comparable company values, and we incorporate the NPV of cost synergies as well as the separation of Venator (VNTR), which we now value at the current market price of $22.29 for the purpose of our SOTP analysis. As shown in Figure 2 below, our target breaks down as $27 per share of value for Huntsman ex VNTR plus $7 per share of value for Huntsman’s 75% stake in VNTR. On an EV/EBITDA basis, HUN shares now trade at 8.7x our 2018 pro forma EBITDA of $2.24bn for HuntsmanClariant, and 7.6x our 2018 EBITDA estimate inclusive of $320mn in discounted synergy value. This compares to an average of 9.3x 2018E EBITDA for US-based diversified peers DowDuPont, Eastman Chemical and Celanese and an average of 6.7x for a trio of European peers: Evonik, Covestro and Arkema. 

“Huntsman raises guidance despite stiff Harvey headwinds,” said Vertical Research Partners Chemicals Analyst Kevin McCarthy. In a press release… Huntsman indicated that the company now expects 3Q17 earnings to fare better than 2Q17 pro forma results, despite an estimated headwind of $35-40 million associated with Hurricane Harvey.”


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