11.08.17
Westlake Chemical Corporation (WLK: Buy, $92 PT)
Broad Based Beat Down
• WLK posted impressive 3Q results. Our first blush analysis suggests that WLK printed EPS of $1.64, consisting of GAAP EPS of $1.61 plus $0.03 of transaction and integration-related costs. This compares to our $1.25E and consensus of $1.45. Recall that we had raised our 4Q and 2018 estimates ahead of the quarter, though we had trimmed our 3Q estimate by $0.04 per share despite our expectation that Westlake sustained minimal flood related issues as we suspected the company faced elevated logistics costs in the short term. Notwithstanding these challenges, Westlake delivered a solid operational beat. On a segment basis, earnings in Westlake’s Olefins and Vinyls segments both exceeded our forecast, while a higher than expected interest expense and tax rate combined for a headwind of $0.09 in EPS terms. While we suspect the Olefins segment is benefitting from transient tailwinds as Westlake was one of the few major PE producers to escape Harvey unscathed, we have more confidence in the sustainability of the Vinyls performance, which surpassed our estimate by $0.33 in EPS terms. We await the call to hear more about how Harvey or any FIFO accounting metrics may have impacted the quarter. Based on partial balance sheet disclosures, we estimate that net debt declined by $415mn sequentially to finish the quarter at $2.67bn or 1.6x our current 2017 estimate of EBITDA.
• Olefins capitalize on strong margins. In EPS terms, Olefins beat our estimate by $0.20 as the segment EBIT margin of 32.9% represented a sequential uptick of 370bps, well ahead of the 26.4% we had anticipated. Recall that we had lowered our margin estimates due to the expectation of higher logistics costs given flooding on the US Gulf Coast. We believe Westlake was one of the few major producers of polyethylene (PE) to emerge from Hurricane Harvey without suffering significant operational downtime. Thus the company would have been able to take full advantage of the subsequent $0.07/lb of 3Q PE price increases, as highlighted in our most recent Commodity Chemical Calculus report (click here). Given our expectation that North American PE margins should contract through 2018, we believe these results may be viewed as somewhat transient. That said, with the company looking to delever, the cash flow is certainly welcome.
• Vinyls segment blows out the quarter. At $223mn of EBIT, the Vinyls business came in well ahead of the $162mn we had penciled in. Sequentially, Vinyls segment sales improved by $117mn while EBIT was up $72mn. Margins expanded 370bps from 2Q levels as the company benefited from higher operating rates, lower maintenance costs, and higher prices. The results are encouraging given our expectations of continued price traction in the chlor-alkali market. To that end, we currently expect caustic soda prices to increase by $40 per dry short ton sequentially in 4Q17.
• We rate WLK shares Buy. Our target of $92 is based on an average of two valuation frameworks; a relative EV/EBITDA multiple and a relative normalized P/E multiple, each of which is supplemented by an estimated value of $4 per share to reflect financial engineering optionality associated with Westlake’s MLP affiliate, WLKP. Our relative EV/EBITDA multiple methodology, which yields warranted value of $106, incorporates a multiple discount of -1.0x vs. the group, which is the same as the discount that we apply to Olin. Our normalized P/E methodology, which yields warranted value of $78, utilizes a 25% discount to the group average multiple as applied to our normalized EPS estimate.
(Please see full report for details)
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Westlake Chemical Corp. (WLK: Buy, $101 PT)
Vinyls Record; Raising Estimates Again
• Earnings leverage continues to prove out. We exit the 3Q17 quarter feeling comfortable with our bullish view on Westlake. In an impressive display of earnings leverage, 3Q17 EBITDA of $528mn exceeded our estimate by $0.52 in EPS terms and beat the Street by $0.34. Operating margin in Westlake’s Vnyls business increased 370bps q-q, driven by higher prices and lower maintenance costs. Regarding the former, prices for caustic soda have continued to climb through 4Q and we anticipate more of the same in 2018. As per the latter, Westlake should see additional non-cyclical tailwinds as the company laps nearly $170mn of deferred maintenance spending associated with the legacy Axiall businesses. Layer in additional opportunities for synergy capture, and double-digit EPS growth (again) in 2018 looks quite achievable to us. Finally, de-leveraging continues apace. Westlake reduced net debt by $414mn in 3Q17 making more than $600mn in the 13 months following closure of the Axiall deal on 31 August 2016. At this rate, the company will soon shift to a position of excess capital once again, with positive implications for EPS accretion and Westlake’s trading multiple. On balance, we continue to believe that WLK shares offer attractive value notwithstanding a stock run of 64% YTD.
• Our top 10 takeaways: (1) adjusted EPS of $1.64 came in ahead of the street at $1.45 and our $1.25E; (2) in EPS terms, core EBIT was an even larger beat of $0.51 vs. our estimate; (3) higher interest expense, and higher than expected tax rate represented a combined headwind of $0.09; (4) we estimate that $70mn in sequential EBIT growth in Vinyls is comprised of $25mn in price gains, $25mn in lower maintenance expense, and $20mn in synergies and higher operating rates; (5) unlike peers across the US petrochemicals industry, the company did not experience any additional costs associated with flooding from Hurricane Harvey; (6) FIFO accounting added roughly...
• We increase our 2017 and 2018 estimates. Following the stronger than expected 3Q performance, we are raising our 4Q EPS estimate by $0.19 to $1.47 from $1.28. Given the higher earnings base and expectations for continued price traction in caustic soda, we also lift our 2018 EPS estimate by $0.60 to $6.10. The primary driver of the estimate revisions is elevated expectations for Westlake’s Vinyls business. However, the higher earnings base also lifts our 2018 estimates for the Olefins segment by a more modest amount. We continue to expect y-y contraction in polyethylene (PE) resin margin in 2018, although nascent momentum in Brent crude oil prices could cushion the blow as we discuss in our most recent edition of Commodity Chemical Calculus (click here).
• We rate WLK shares Buy and raise our PT by $9 to $101. Our revised price target suggests total upside potential of 11% including a dividend yield of 0.9%. As a reminder, our WLK price target is based on an average of two valuation frameworks; a relative EV/EBITDA multiple and a relative normalized P/E multiple, each of which is supplemented by an estimated value of $4 per share to reflect financial engineering optionality associated with Westlake’s MLP affiliate, WLKP. Our relative EV/EBITDA multiple methodology, which yields warranted value of $112, incorporates a multiple discount of -1.5x vs. the group. Our normalized P/E methodology, which yields warranted value of $82, utilizes a 20% discount to the group average multiple as applied to our normalized EPS estimate of $5.80.
(Please see full report for details)
Broad Based Beat Down
• WLK posted impressive 3Q results. Our first blush analysis suggests that WLK printed EPS of $1.64, consisting of GAAP EPS of $1.61 plus $0.03 of transaction and integration-related costs. This compares to our $1.25E and consensus of $1.45. Recall that we had raised our 4Q and 2018 estimates ahead of the quarter, though we had trimmed our 3Q estimate by $0.04 per share despite our expectation that Westlake sustained minimal flood related issues as we suspected the company faced elevated logistics costs in the short term. Notwithstanding these challenges, Westlake delivered a solid operational beat. On a segment basis, earnings in Westlake’s Olefins and Vinyls segments both exceeded our forecast, while a higher than expected interest expense and tax rate combined for a headwind of $0.09 in EPS terms. While we suspect the Olefins segment is benefitting from transient tailwinds as Westlake was one of the few major PE producers to escape Harvey unscathed, we have more confidence in the sustainability of the Vinyls performance, which surpassed our estimate by $0.33 in EPS terms. We await the call to hear more about how Harvey or any FIFO accounting metrics may have impacted the quarter. Based on partial balance sheet disclosures, we estimate that net debt declined by $415mn sequentially to finish the quarter at $2.67bn or 1.6x our current 2017 estimate of EBITDA.
• Olefins capitalize on strong margins. In EPS terms, Olefins beat our estimate by $0.20 as the segment EBIT margin of 32.9% represented a sequential uptick of 370bps, well ahead of the 26.4% we had anticipated. Recall that we had lowered our margin estimates due to the expectation of higher logistics costs given flooding on the US Gulf Coast. We believe Westlake was one of the few major producers of polyethylene (PE) to emerge from Hurricane Harvey without suffering significant operational downtime. Thus the company would have been able to take full advantage of the subsequent $0.07/lb of 3Q PE price increases, as highlighted in our most recent Commodity Chemical Calculus report (click here). Given our expectation that North American PE margins should contract through 2018, we believe these results may be viewed as somewhat transient. That said, with the company looking to delever, the cash flow is certainly welcome.
• Vinyls segment blows out the quarter. At $223mn of EBIT, the Vinyls business came in well ahead of the $162mn we had penciled in. Sequentially, Vinyls segment sales improved by $117mn while EBIT was up $72mn. Margins expanded 370bps from 2Q levels as the company benefited from higher operating rates, lower maintenance costs, and higher prices. The results are encouraging given our expectations of continued price traction in the chlor-alkali market. To that end, we currently expect caustic soda prices to increase by $40 per dry short ton sequentially in 4Q17.
• We rate WLK shares Buy. Our target of $92 is based on an average of two valuation frameworks; a relative EV/EBITDA multiple and a relative normalized P/E multiple, each of which is supplemented by an estimated value of $4 per share to reflect financial engineering optionality associated with Westlake’s MLP affiliate, WLKP. Our relative EV/EBITDA multiple methodology, which yields warranted value of $106, incorporates a multiple discount of -1.0x vs. the group, which is the same as the discount that we apply to Olin. Our normalized P/E methodology, which yields warranted value of $78, utilizes a 25% discount to the group average multiple as applied to our normalized EPS estimate.
(Please see full report for details)
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Westlake Chemical Corp. (WLK: Buy, $101 PT)
Vinyls Record; Raising Estimates Again
• Earnings leverage continues to prove out. We exit the 3Q17 quarter feeling comfortable with our bullish view on Westlake. In an impressive display of earnings leverage, 3Q17 EBITDA of $528mn exceeded our estimate by $0.52 in EPS terms and beat the Street by $0.34. Operating margin in Westlake’s Vnyls business increased 370bps q-q, driven by higher prices and lower maintenance costs. Regarding the former, prices for caustic soda have continued to climb through 4Q and we anticipate more of the same in 2018. As per the latter, Westlake should see additional non-cyclical tailwinds as the company laps nearly $170mn of deferred maintenance spending associated with the legacy Axiall businesses. Layer in additional opportunities for synergy capture, and double-digit EPS growth (again) in 2018 looks quite achievable to us. Finally, de-leveraging continues apace. Westlake reduced net debt by $414mn in 3Q17 making more than $600mn in the 13 months following closure of the Axiall deal on 31 August 2016. At this rate, the company will soon shift to a position of excess capital once again, with positive implications for EPS accretion and Westlake’s trading multiple. On balance, we continue to believe that WLK shares offer attractive value notwithstanding a stock run of 64% YTD.
• Our top 10 takeaways: (1) adjusted EPS of $1.64 came in ahead of the street at $1.45 and our $1.25E; (2) in EPS terms, core EBIT was an even larger beat of $0.51 vs. our estimate; (3) higher interest expense, and higher than expected tax rate represented a combined headwind of $0.09; (4) we estimate that $70mn in sequential EBIT growth in Vinyls is comprised of $25mn in price gains, $25mn in lower maintenance expense, and $20mn in synergies and higher operating rates; (5) unlike peers across the US petrochemicals industry, the company did not experience any additional costs associated with flooding from Hurricane Harvey; (6) FIFO accounting added roughly...
• We increase our 2017 and 2018 estimates. Following the stronger than expected 3Q performance, we are raising our 4Q EPS estimate by $0.19 to $1.47 from $1.28. Given the higher earnings base and expectations for continued price traction in caustic soda, we also lift our 2018 EPS estimate by $0.60 to $6.10. The primary driver of the estimate revisions is elevated expectations for Westlake’s Vinyls business. However, the higher earnings base also lifts our 2018 estimates for the Olefins segment by a more modest amount. We continue to expect y-y contraction in polyethylene (PE) resin margin in 2018, although nascent momentum in Brent crude oil prices could cushion the blow as we discuss in our most recent edition of Commodity Chemical Calculus (click here).
• We rate WLK shares Buy and raise our PT by $9 to $101. Our revised price target suggests total upside potential of 11% including a dividend yield of 0.9%. As a reminder, our WLK price target is based on an average of two valuation frameworks; a relative EV/EBITDA multiple and a relative normalized P/E multiple, each of which is supplemented by an estimated value of $4 per share to reflect financial engineering optionality associated with Westlake’s MLP affiliate, WLKP. Our relative EV/EBITDA multiple methodology, which yields warranted value of $112, incorporates a multiple discount of -1.5x vs. the group. Our normalized P/E methodology, which yields warranted value of $82, utilizes a 20% discount to the group average multiple as applied to our normalized EPS estimate of $5.80.
(Please see full report for details)
