Huntsman Corporation (HUN: Buy, $43 PT) 
What’s the Opposite of a Value Trap?
• We continue to view HUN shares as a bona fide value. Polyurethanes posted record results in 4Q, yet a short-term margin spike in MDI (urethane intermediate) supported by industry capacity utilization of ~95% may be perceived as “too good” by some investors, i.e. unsustainable. So, in that context, is Huntsman stock a “value trap”? We think not for two reasons. First, while we expect spot MDI prices to moderate from 4Q17 levels, particularly in Asia and to a lesser extent in Europe, we are encouraged by industry supply-demand dynamics and see a runway of positive MDI performance measured in years. Second, while MDI has “over-earned” by perhaps $125mn in 2H17, we see elsewhere in Huntsman’s portfolio two businesses -- MTBE and Performance Products – that are under-earning by ~$200mn per annum in our estimation on a combined basis. All in, we see fit to raise our 2018 EPS estimate as discussed below. Looking ahead, we expect investors’ attention to remain focused on three key issues (A) near-term fundamental prospects in MDI; (B) ongoing balance sheet improvement to investment-grade status (and then some), driven by solid FCF and the likely liquidation of Huntsman’s remaining 53% stake in Venator (VNTR) and (C) a wide valuation gap – unsustainably so in our view – between HUN shares and industry peers. HUN remains our top pick in the Chemicals sector. We expect to see consensus estimates rise, while the wide valuation discount to the sector narrows somewhat as 2018 progresses.
• Top 10 takeaways: 1) adjusted 4Q17 EPS of $0.76 eclipsed our $0.67E and consensus of $0.65; (2) 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; (3) Polyurethanes (PU) posted the largest positive earnings variance vs. our forecast, followed by Advanced Materials and Textile Effects, while Performance Products (PP) came in light due to unplanned outages; (4) PU enjoyed earnings boost of $85mn from short-term margin spike (mainly MDI) up from $40mn in 3Q17; (5) MDI volumes grew...
• We increase our above-consensus 2018 EPS estimate by $0.15 to $2.90. Our estimate is supported by sales and earnings upside in 4Q, particularly in Polyurethanes, as well as a lower projected tax rate of 22.0% vs. 24.4% as previously modeled. As 2018 progresses, we expect MDI selling prices and earnings to regress from lofty levels in Asia, while prices in Europe ease, but volumes remain strong. In the US, PU segment earnings prospects look up, supported by higher MDI prices and volumes with risk to the upside perhaps from a low earnings base in MTBE.
• We rate HUN shares Buy and maintain our target of $43. Our target remains $43 as an uplift in earnings is offset by a decline in the value of Huntsman’s 53% stake in Venator (VNTR), shares of which declined 7.4% on Friday’s session. HUN shares trade at 11.6x our upwardly revised EPS estimate of $2.90 for 2018. As adjusted for the monetization of VNTR, which is worth $4.20 per share net of taxes, the stock’s 2018 P/E multiple drops by 1.4x to 10.2x, which represents a 38% discount to the average of 16.5x for the 18 stocks in our coverage universe. Our target implies total return potential of 30%, including a new dividend yield of 1.9% following Friday’s dividend hike of 30%. We value Huntsman based on the value of its stake in VNTR net of taxes and fees 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 $49 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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