06.03.18
Huntsman Corporation (HUN: Buy, $43 PT)
PU Segment Drives Strong 4Q; Launches $450mn Repo, Hikes Div. 30%
• Huntsman reported impressive 4Q results. Adjusted 4Q17 EPS of $0.76 eclipsed our $0.67E and consensus of $0.65. EBITDA of $360mn likewise came in ahead of our estimate and management’s 25 January preannouncement calling for EBITDA to modestly outperform the $340mn reported in 3Q17. Our preliminary analysis suggests that a lower 4Q tax rate added $0.10 to EPS, offset by a $0.09 drag from higher NCI. On a segment basis, Polyurethanes posted the largest positive earnings variance vs. our forecast, followed by Advanced Materials and Textile Effects, while Performance Products came in light due to unplanned outages and weather-related issues. On balance, we are impressed and look forward to diving deeper during the company’s upcoming earnings call at 10:00AM eastern time.
• Rapid improvement in balance sheet and FCF supports return of cash to shareholders. HUN generated adjusted FCF of $594mn for the year, well over the company’s FCF goal of $450mn, and management increased its FCF target for 2018+ by $50mn to $450-650mn. Aided by proceeds from the Venator (VNTR) stock offering, net debt declined by another $0.6bn in 4Q to $1.82bn or 1.4x our 2018 estimate of EBITDA. In this context, Huntsman increased its quarterly dividend distribution by 30% to $0.1625 per share (new yield 2.0%) and initiated a share repurchase program of $450mn or 5.6% of the company’s equity market capitalization. The latter comes a bit earlier than we anticipated as we suspected management might take a “go slow” approach to repurchases pending (an eventual) upgrade in credit status to investment grade, which we still believe is in the cards for 2018.
• Polyurethanes price drove substantial earnings upside. Segment EBITDA of $294mn beat the $246mn that we had penciled in with ease. Sequentially, sales increased $30mn while EBITDA improved $49mn, delivering exceptionally strong incremental margins as a price contribution of 20% in local currency flowed through financials. Looking ahead, MDI prices in the US have remained firm YTD, while prices in Europe have begun to decline and spot prices in China continue to regress from a recent peak in mid-October 2017. We expect component (commodity) MDI margins to remain healthy through 1Q, aided by recent raw material cost relief (benzene) and supply tightness in the US following force majeure declarations by competitors DowDuPont and BASF. While improvements in MDI propelled upside in 4Q, we estimate that MTBE margins also...
• Performance Products misses as outages weigh on results. In EPS terms, EBITDA of $47mn was a $0.05 headwind vs. the $63mn we had estimated. Management cited production issues of both the planned and unplanned varieties at the company’s ethylene facility in Port Neches, Texas. We had previously expected a $15mn drag from a EO/EG but suspect the ultimate impact of outages was greater. While it is possible that these headwinds continued into 1Q, as of the company’s 25 January preannounce these issues were said to have been resolved. Thus...
• Advanced Materials earnings hung in well. EBITDA of $53mn surpassed the $51mn that we had projected. As previously telegraphed by Huntsman, the segment faced elevated base liquid epoxy resin (BLR) costs in Asia, which is the only geography where the company is not backward integrated into the product. Notwithstanding this pressure, margins of 20.5% exceeded the 19.2% that we had modeled, and represent a sequential decline of 80bps. Looking ahead...
• We rate shares of HUN Buy, with a price target of $43. Our price target implies total return potential of 30%, including a dividend yield of 1.5%. We value Huntsman based on the value of its stake in VNTR net of taxes and fees (~$4.50 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 $46 per share on a Huntsman stand-alone basis. Using our relative valuation framework, our P/E multiple at a 25% discount to the S&P500 multiple implies a fair value of $35, while our EV/EBITDA-based valuation incorporates a discount of 2.25 turns vs. our coverage average, and implies a fair value of $31 per HUN share.
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PU Segment Drives Strong 4Q; Launches $450mn Repo, Hikes Div. 30%
• Huntsman reported impressive 4Q results. Adjusted 4Q17 EPS of $0.76 eclipsed our $0.67E and consensus of $0.65. EBITDA of $360mn likewise came in ahead of our estimate and management’s 25 January preannouncement calling for EBITDA to modestly outperform the $340mn reported in 3Q17. Our preliminary analysis suggests that a lower 4Q tax rate added $0.10 to EPS, offset by a $0.09 drag from higher NCI. On a segment basis, Polyurethanes posted the largest positive earnings variance vs. our forecast, followed by Advanced Materials and Textile Effects, while Performance Products came in light due to unplanned outages and weather-related issues. On balance, we are impressed and look forward to diving deeper during the company’s upcoming earnings call at 10:00AM eastern time.
• Rapid improvement in balance sheet and FCF supports return of cash to shareholders. HUN generated adjusted FCF of $594mn for the year, well over the company’s FCF goal of $450mn, and management increased its FCF target for 2018+ by $50mn to $450-650mn. Aided by proceeds from the Venator (VNTR) stock offering, net debt declined by another $0.6bn in 4Q to $1.82bn or 1.4x our 2018 estimate of EBITDA. In this context, Huntsman increased its quarterly dividend distribution by 30% to $0.1625 per share (new yield 2.0%) and initiated a share repurchase program of $450mn or 5.6% of the company’s equity market capitalization. The latter comes a bit earlier than we anticipated as we suspected management might take a “go slow” approach to repurchases pending (an eventual) upgrade in credit status to investment grade, which we still believe is in the cards for 2018.
• Polyurethanes price drove substantial earnings upside. Segment EBITDA of $294mn beat the $246mn that we had penciled in with ease. Sequentially, sales increased $30mn while EBITDA improved $49mn, delivering exceptionally strong incremental margins as a price contribution of 20% in local currency flowed through financials. Looking ahead, MDI prices in the US have remained firm YTD, while prices in Europe have begun to decline and spot prices in China continue to regress from a recent peak in mid-October 2017. We expect component (commodity) MDI margins to remain healthy through 1Q, aided by recent raw material cost relief (benzene) and supply tightness in the US following force majeure declarations by competitors DowDuPont and BASF. While improvements in MDI propelled upside in 4Q, we estimate that MTBE margins also...
• Performance Products misses as outages weigh on results. In EPS terms, EBITDA of $47mn was a $0.05 headwind vs. the $63mn we had estimated. Management cited production issues of both the planned and unplanned varieties at the company’s ethylene facility in Port Neches, Texas. We had previously expected a $15mn drag from a EO/EG but suspect the ultimate impact of outages was greater. While it is possible that these headwinds continued into 1Q, as of the company’s 25 January preannounce these issues were said to have been resolved. Thus...
• Advanced Materials earnings hung in well. EBITDA of $53mn surpassed the $51mn that we had projected. As previously telegraphed by Huntsman, the segment faced elevated base liquid epoxy resin (BLR) costs in Asia, which is the only geography where the company is not backward integrated into the product. Notwithstanding this pressure, margins of 20.5% exceeded the 19.2% that we had modeled, and represent a sequential decline of 80bps. Looking ahead...
• We rate shares of HUN Buy, with a price target of $43. Our price target implies total return potential of 30%, including a dividend yield of 1.5%. We value Huntsman based on the value of its stake in VNTR net of taxes and fees (~$4.50 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 $46 per share on a Huntsman stand-alone basis. Using our relative valuation framework, our P/E multiple at a 25% discount to the S&P500 multiple implies a fair value of $35, while our EV/EBITDA-based valuation incorporates a discount of 2.25 turns vs. our coverage average, and implies a fair value of $31 per HUN share.
(Please see full report for details)
