07.01.18
Univar Inc. (UNVR, Hold, $31 PT)
Shrinking to Prosperity?
• Univar reported a good quarter, despite ongoing volume erosion. While core EBITDA results were in line with our expectations, we are encouraged by Univar’s steady progress on margins. We see more reason than not that this trend should continue through 1H18 given a combination of company-specific initiatives, commodity inflation, and a weaker USD. However, volumes across the company remain under pressure at -5% y-y in 4Q. For overall earnings growth to continue at the current clip, we will likely need to see this trend reverse. We believe the macro backdrop remains favorable with synchronous global growth, so we are inclined to believe the stage is set for volumes to turn the corner when customer and product deselection has run its course. The precise timing of Univar’s volume inflection remains less clear to us however, so we continue to rate UNVR shares Hold having upgraded from Sell on 20 February (click here). In the meantime, we increase our price target by $1 to $31, supported by higher EPS estimates.
• Top 10 Takeaways: (1) Univar reported adjusted 4Q17 EPS of $0.34 vs. consensus of $0.22 and our $0.21E; (2) the better than expected results were driven by below the line items as comparable EBITDA was in line; (3) on a segment basis, EMEA earnings beat by $2mn, while Canada was in line, and USA missed by a modest $2mn; (4) the company did not see any headwinds from Hurricane Harvey during the quarter, whereas we had modeled a headwind of $6mn; (5) volumes declined 5%, price was up 10%, and currency was +3%; (6) while Univar’s $50mn productivity program remains on target, the company is spending some of the savings on salesforce and digital investments while a portion is...
• Changes to our model: Following better than expected margin performance for 4Q we raise our 2018 EBITDA estimate modestly, as adjusted for new pension accounting methodology. Our new 2018 EBITDA forecast of $660mn is below our prior $664mn, although would represent a $6mn increase on an apples-apples basis for pension accounting. Accordingly, our EPS rises to $1.65E from $1.45E as interest expense and other expense trend lower. We have also reduced our forecast tax rate a bit to 22.5% from 23.2%.
• We rate UNVR Hold and increase our price target by $1 to $31. Our new target suggests that shares offer total return potential of 5% (UNVR shares do not currently pay a dividend). We base our valuation of UNVR on an average of 3 methodologies: DCF, relative P/E multiple, and a relative EV/EBITDA multiple. Our DCF analysis supports a fair value of $36 per share. We apply a 0% premium to the S&P500 market P/E multiple (2018 basis) to generate a relative P/E value of $28, and finally we apply a premium of 1.0x to the average EBITDA multiple for our coverage average, which gives us warranted value of $30 per share. We remind investors that, unlike Univar, we do not add back stock-based compensation expense ($20mn in 2017 and an estimated $25mn in 2018E) to calculate adjusted EBITDA used for valuation purposes.
(Please see full report for details)
Shrinking to Prosperity?
• Univar reported a good quarter, despite ongoing volume erosion. While core EBITDA results were in line with our expectations, we are encouraged by Univar’s steady progress on margins. We see more reason than not that this trend should continue through 1H18 given a combination of company-specific initiatives, commodity inflation, and a weaker USD. However, volumes across the company remain under pressure at -5% y-y in 4Q. For overall earnings growth to continue at the current clip, we will likely need to see this trend reverse. We believe the macro backdrop remains favorable with synchronous global growth, so we are inclined to believe the stage is set for volumes to turn the corner when customer and product deselection has run its course. The precise timing of Univar’s volume inflection remains less clear to us however, so we continue to rate UNVR shares Hold having upgraded from Sell on 20 February (click here). In the meantime, we increase our price target by $1 to $31, supported by higher EPS estimates.
• Top 10 Takeaways: (1) Univar reported adjusted 4Q17 EPS of $0.34 vs. consensus of $0.22 and our $0.21E; (2) the better than expected results were driven by below the line items as comparable EBITDA was in line; (3) on a segment basis, EMEA earnings beat by $2mn, while Canada was in line, and USA missed by a modest $2mn; (4) the company did not see any headwinds from Hurricane Harvey during the quarter, whereas we had modeled a headwind of $6mn; (5) volumes declined 5%, price was up 10%, and currency was +3%; (6) while Univar’s $50mn productivity program remains on target, the company is spending some of the savings on salesforce and digital investments while a portion is...
• Changes to our model: Following better than expected margin performance for 4Q we raise our 2018 EBITDA estimate modestly, as adjusted for new pension accounting methodology. Our new 2018 EBITDA forecast of $660mn is below our prior $664mn, although would represent a $6mn increase on an apples-apples basis for pension accounting. Accordingly, our EPS rises to $1.65E from $1.45E as interest expense and other expense trend lower. We have also reduced our forecast tax rate a bit to 22.5% from 23.2%.
• We rate UNVR Hold and increase our price target by $1 to $31. Our new target suggests that shares offer total return potential of 5% (UNVR shares do not currently pay a dividend). We base our valuation of UNVR on an average of 3 methodologies: DCF, relative P/E multiple, and a relative EV/EBITDA multiple. Our DCF analysis supports a fair value of $36 per share. We apply a 0% premium to the S&P500 market P/E multiple (2018 basis) to generate a relative P/E value of $28, and finally we apply a premium of 1.0x to the average EBITDA multiple for our coverage average, which gives us warranted value of $30 per share. We remind investors that, unlike Univar, we do not add back stock-based compensation expense ($20mn in 2017 and an estimated $25mn in 2018E) to calculate adjusted EBITDA used for valuation purposes.
(Please see full report for details)
