12.04.17
Axalta (AXTA: Hold, $31 PT)
It Takes Two to Tango; Move to Hold on Deal Break
• Axalta is 0-2 now on consummating major deals. With Berkshire Hathaway owning approximately 9.6% of AXTA shares, we would like to think that the third time could be a charm, but we have no reason to believe this wishful thinking will come to fruition anytime soon, or ever for that matter. So, with M&A talks having been aborted now on two separate occasions with two separate counterparties (Akzo and now Nippon Paint), we find it prudent to refocus on more traditional valuation metrics, predicated mainly upon Axalta’s fundamental prospects. As we do so, we think shares are now fairly valued near our revised target of $31.
• What happened to Nippon Paint? On Thursday afternoon news broke that Nippon Paint had informed the Axalta board of directors that it was unwilling to meet Axalta’s expectations regarding the value of the company. Nippon’s board apparently grew uncomfortable with the level of financial leverage that would be required to consummate the deal. Indeed, we had considered financing to be “a bit of a mystery” as we characterized it our note last week (click here), since we were uncertain as to how Nippon would manage to finance a reported “all-cash” offer at a significant premium for a company not much smaller than itself. We therefore surmised that...
• With Nippon out, Axalta’s strategic options are dwindling. While we have now seen two deals for Axalta fall apart in recent weeks, we do know that Nippon Paint was (in theory at least) willing to pay at least $33.54 for Axalta, and we know that Axalta has been willing to entertain discussions for a sale of the company, at the right price. This begs the question of whether there may be others willing, or even eager to engage with Axalta. For example, could Akzo Nobel re-emerge as an interested party down the line? Possibly, but our latest understanding is that it was Akzo that terminated MOE discussions with Axalta, not vice-versa. As reported by...
• Fundamentals are now front and center once again. Prior to our 30 October upgrade of Axalta, we were Hold rated as concerns over valuation, margin contraction, and lofty Street estimates kept us on the sidelines. Now that the deals have broken, we are refocusing on the fundamentals, which at this point remain largely unchanged from our prior stance. While the company has seen destocking in its refinish distribution channel and some price pressure among multi-shop operator (MSO) customers, we do not believe these are durable structural issues, and thus expect they will pass in time. However, we do continue to see...
• We move back to Hold and cut our price target to $31 from $37. This level is slightly higher than our prior estimated range of $29-30 excluding M&A optionality for two reasons: (1) market multiples have continued to rise in recent weeks; and (2) while M&A optionality appears to be greatly reduced, we suspect it has not vanished completely, at least over the 12-month time horizon that is the basis for our price objective. Still, after today’s retracement of 15.7%, Axalta trades only on par with closest peer PPG based on a multiple of 2018E EBITDA and the stock retains a P/E multiple premium of nearly 6.0x. Given Axalta’s elevated exposure to autos, recent challenges in refinish coatings, margin pressure across the portfolio, and lower balance sheet flexibility vs. peers, we do not feel this valuation level warrants a more constructive posture at this time. 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 $31. Using our relative P/E framework wherein we now apply a 25% premium to the S&P500 multiple, we calculate warranted value of $30 per AXTA share.
(Please see full report for details)
It Takes Two to Tango; Move to Hold on Deal Break
• Axalta is 0-2 now on consummating major deals. With Berkshire Hathaway owning approximately 9.6% of AXTA shares, we would like to think that the third time could be a charm, but we have no reason to believe this wishful thinking will come to fruition anytime soon, or ever for that matter. So, with M&A talks having been aborted now on two separate occasions with two separate counterparties (Akzo and now Nippon Paint), we find it prudent to refocus on more traditional valuation metrics, predicated mainly upon Axalta’s fundamental prospects. As we do so, we think shares are now fairly valued near our revised target of $31.
• What happened to Nippon Paint? On Thursday afternoon news broke that Nippon Paint had informed the Axalta board of directors that it was unwilling to meet Axalta’s expectations regarding the value of the company. Nippon’s board apparently grew uncomfortable with the level of financial leverage that would be required to consummate the deal. Indeed, we had considered financing to be “a bit of a mystery” as we characterized it our note last week (click here), since we were uncertain as to how Nippon would manage to finance a reported “all-cash” offer at a significant premium for a company not much smaller than itself. We therefore surmised that...
• With Nippon out, Axalta’s strategic options are dwindling. While we have now seen two deals for Axalta fall apart in recent weeks, we do know that Nippon Paint was (in theory at least) willing to pay at least $33.54 for Axalta, and we know that Axalta has been willing to entertain discussions for a sale of the company, at the right price. This begs the question of whether there may be others willing, or even eager to engage with Axalta. For example, could Akzo Nobel re-emerge as an interested party down the line? Possibly, but our latest understanding is that it was Akzo that terminated MOE discussions with Axalta, not vice-versa. As reported by...
• Fundamentals are now front and center once again. Prior to our 30 October upgrade of Axalta, we were Hold rated as concerns over valuation, margin contraction, and lofty Street estimates kept us on the sidelines. Now that the deals have broken, we are refocusing on the fundamentals, which at this point remain largely unchanged from our prior stance. While the company has seen destocking in its refinish distribution channel and some price pressure among multi-shop operator (MSO) customers, we do not believe these are durable structural issues, and thus expect they will pass in time. However, we do continue to see...
• We move back to Hold and cut our price target to $31 from $37. This level is slightly higher than our prior estimated range of $29-30 excluding M&A optionality for two reasons: (1) market multiples have continued to rise in recent weeks; and (2) while M&A optionality appears to be greatly reduced, we suspect it has not vanished completely, at least over the 12-month time horizon that is the basis for our price objective. Still, after today’s retracement of 15.7%, Axalta trades only on par with closest peer PPG based on a multiple of 2018E EBITDA and the stock retains a P/E multiple premium of nearly 6.0x. Given Axalta’s elevated exposure to autos, recent challenges in refinish coatings, margin pressure across the portfolio, and lower balance sheet flexibility vs. peers, we do not feel this valuation level warrants a more constructive posture at this time. 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 $31. Using our relative P/E framework wherein we now apply a 25% premium to the S&P500 multiple, we calculate warranted value of $30 per AXTA share.
(Please see full report for details)
