11.09.17
Huntsman Corporation (HUN, Buy: $40 PT)
Shares Clear for Takeoff with Solo Flight Plan
• We caught up with management on the road in Boston. We hosted CEO Peter Huntsman, CFO Sean Douglas, and President of Polyurethanes, Tony Hankins for meetings with investors earlier this week. With Huntsman and Clariant having mutually agreed to abandon a planned merger of equals (MOE), investors are refocusing on Huntsman’s “new” portfolio, i.e. excluding the company’s remaining 75% stake in Buy-rated Venator (VNTR), which we expect to be monetized by year-end 2018. As we exit our discussions, we remain constructive on HUN shares, based on sustainable earnings growth prospects in Polyurethanes (PU) and solid FCF generation that should support investment-grade credit metrics by mid-2018. At $31.55, our price target of $40 suggests upside of 28% remains.
• We consider Polyurethanes (PU) to be under-appreciated by the Street. We believe that the apparent capitalization of Huntsman’s PU segment earnings at a pure commodity multiple is misguided for three reasons: (A) MDI, the key urethane intermediate in Huntsman’s PU business, continues to grow at double the rate of GDP, as it has for many years, (B) the global industry structure is an attractive oligopoly; Huntsman and four peers -- Yantai Wanhua, BASF, Covestro, and DowDuPont/Sadara -- together control ~90% of global MDI production capacity; and (C) Huntsman enjoys...
• The balance of Huntsman’s portfolio appears to be on steady course. Performance Products continues to rebound from a depressed earnings base in 2016 as excess capacity is absorbed in amines and maleic anhydride (MA). We expect Advanced Materials to continue to generate steady earnings with best-in-class margins, supported by Huntsman’s consistent, strategic deselection of commodity liquid epoxy resins (LER), which now make up only 4% of segment sales. Finally, Textile Effects continues to enjoy premium volume growth of ~7%, aided by the company’s superior...
• What about M&A? With the Clariant deal having been scuttled, inquiring investor minds want to know whether Huntsman is in play or not. Our answer: don’t count on it, at least for now. While urethane chemistry could be an interesting fit for Buy-rated Lyondell (LYB) at some point, we’d characterize a LYB-HUN tie-up as somewhat unlikely at this juncture for four reasons: (A) LYB may have eyes for Braskem (click here); (B) anti-trust issues would need to be navigated in...
• Financial flexibility is rapidly improving. Management has over-delivered on FCF targets over the past two years and has committed to a forward range of $400-$600mn, which implies a FCF yield of 5.2% to 7.8% vs. our 6.1% in 2018. We are impressed with the company’s progress on capex and also working capital, which is now embedded in incentive compensation across the portfolio. Thanks to solid FCF and proceeds from the IPO of VNTR on 3 August, net debt now stands at $2.4bn or 1.9x our 2018 estimate of EBITDA. On a pro forma basis for full monetization of VNTR less estimated taxes and fees of 10%, net debt would sink to...
• Next up: On Friday November 10, we plan to visit Huntsman’s MDI plant in Geismar, Louisiana as one of six stops on our US Gulf Coast field trip.
• We rate shares of HUN Buy, with a price target of $40. Our price target implies total return potential of 28%, including a dividend yield of 1.6%. As a reminder, following the mutual abandonment of the Clariant MOE, we have adjusted our valuation methodology to be more consistent with that of diversified chemical industry peers, such as Celanese and Eastman. We now value Huntsman based on the value of its stake in VNTR (~$7 per HUN share) plus an average of the following three methodologies on an ex-Venator basis: DCF analysis, a relative P/E framework, and a relative EV/EBITDA framework. Our DCF analysis suggests a warranted value of $44 per share on a Huntsman stand-alone basis. Using our relative valuation framework, our P/E multiple at a 35% discount to the S&P500 multiple implies a fair value of $29, while our EV/EBITDA-based valuation incorporates a discount of 2.75 turns vs. our coverage average, and implies a fair value of $27 per HUN share.
(Please see full report for details)
Shares Clear for Takeoff with Solo Flight Plan
• We caught up with management on the road in Boston. We hosted CEO Peter Huntsman, CFO Sean Douglas, and President of Polyurethanes, Tony Hankins for meetings with investors earlier this week. With Huntsman and Clariant having mutually agreed to abandon a planned merger of equals (MOE), investors are refocusing on Huntsman’s “new” portfolio, i.e. excluding the company’s remaining 75% stake in Buy-rated Venator (VNTR), which we expect to be monetized by year-end 2018. As we exit our discussions, we remain constructive on HUN shares, based on sustainable earnings growth prospects in Polyurethanes (PU) and solid FCF generation that should support investment-grade credit metrics by mid-2018. At $31.55, our price target of $40 suggests upside of 28% remains.
• We consider Polyurethanes (PU) to be under-appreciated by the Street. We believe that the apparent capitalization of Huntsman’s PU segment earnings at a pure commodity multiple is misguided for three reasons: (A) MDI, the key urethane intermediate in Huntsman’s PU business, continues to grow at double the rate of GDP, as it has for many years, (B) the global industry structure is an attractive oligopoly; Huntsman and four peers -- Yantai Wanhua, BASF, Covestro, and DowDuPont/Sadara -- together control ~90% of global MDI production capacity; and (C) Huntsman enjoys...
• The balance of Huntsman’s portfolio appears to be on steady course. Performance Products continues to rebound from a depressed earnings base in 2016 as excess capacity is absorbed in amines and maleic anhydride (MA). We expect Advanced Materials to continue to generate steady earnings with best-in-class margins, supported by Huntsman’s consistent, strategic deselection of commodity liquid epoxy resins (LER), which now make up only 4% of segment sales. Finally, Textile Effects continues to enjoy premium volume growth of ~7%, aided by the company’s superior...
• What about M&A? With the Clariant deal having been scuttled, inquiring investor minds want to know whether Huntsman is in play or not. Our answer: don’t count on it, at least for now. While urethane chemistry could be an interesting fit for Buy-rated Lyondell (LYB) at some point, we’d characterize a LYB-HUN tie-up as somewhat unlikely at this juncture for four reasons: (A) LYB may have eyes for Braskem (click here); (B) anti-trust issues would need to be navigated in...
• Financial flexibility is rapidly improving. Management has over-delivered on FCF targets over the past two years and has committed to a forward range of $400-$600mn, which implies a FCF yield of 5.2% to 7.8% vs. our 6.1% in 2018. We are impressed with the company’s progress on capex and also working capital, which is now embedded in incentive compensation across the portfolio. Thanks to solid FCF and proceeds from the IPO of VNTR on 3 August, net debt now stands at $2.4bn or 1.9x our 2018 estimate of EBITDA. On a pro forma basis for full monetization of VNTR less estimated taxes and fees of 10%, net debt would sink to...
• Next up: On Friday November 10, we plan to visit Huntsman’s MDI plant in Geismar, Louisiana as one of six stops on our US Gulf Coast field trip.
• We rate shares of HUN Buy, with a price target of $40. Our price target implies total return potential of 28%, including a dividend yield of 1.6%. As a reminder, following the mutual abandonment of the Clariant MOE, we have adjusted our valuation methodology to be more consistent with that of diversified chemical industry peers, such as Celanese and Eastman. We now value Huntsman based on the value of its stake in VNTR (~$7 per HUN share) plus an average of the following three methodologies on an ex-Venator basis: DCF analysis, a relative P/E framework, and a relative EV/EBITDA framework. Our DCF analysis suggests a warranted value of $44 per share on a Huntsman stand-alone basis. Using our relative valuation framework, our P/E multiple at a 35% discount to the S&P500 multiple implies a fair value of $29, while our EV/EBITDA-based valuation incorporates a discount of 2.75 turns vs. our coverage average, and implies a fair value of $27 per HUN share.
(Please see full report for details)
