07.29.18
Axalta Coating Systems, Ltd. (AXTA: Hold, $31 PT)
Out of the Blocks Well in 2018
• Growth is tracking better to start the year. We attended Axalta’s investor day in NY where CEO Charlie Shaver and the balance of senior management updated us on strategy, execution, and capital deployment. The company affirmed financial goals, but indicated that sales and EBITDA are tracking ahead of plan through February. Management acknowledged potential for one or two large consolidating deals in the global coatings industry. We continue to believe that Axalta may play a role here, although it’s not clear to us that the probability of a large M&A transaction is any higher today than it was yesterday. In the meantime, we expect Axalta to execute on its $200mn restructuring effort (Axalta Way II) while deploying the majority of FCF toward bolt-on acquisitions. Opportunities include the ongoing roll-up of industrial coatings as well as selected auto refinish coatings targets in China, where Axalta sees its “single best growth opportunity”. In contrast, management expressed little interest in additional debt reduction or establishment of a dividend. On balance, we see Axalta as on a better growth trajectory at this juncture, having emerged from a disappointing stretch in auto OEM and refinish coatings through the first nine months of 2017.
• 2018 targets affirmed with a strong start to the year. CFO Robert Bryant expanded upon the key drivers of financial performance, described as the Axalta growth algorithm. This was displayed as an earnings framework driven by low- to mid-single digit organic volume, plus low-single digit pricing, inflation “plus” productivity, and mid-single digits of accretive M&A. Integral to this inflation “plus” productivity is Axalta Way II, which is expected to deliver another $200mn in savings (same as Axalta Way I). For 2018, the company...
• The Auto Refinish Coatings market is still positioned to grow. Axalta affirmed its stance that the refinish business is still ripe for growth, despite the growing trend of automation and driver assist technologies. Despite steady advancement of these technologies, Axalta noted an increase in both the frequency and severity of auto accidents over the past two years. As a result, net insurance claims are expected to grow, not only in the US, but also in the UK and Germany at rates of...
• Industrial Coatings revenue expected to double again. Through a combination of M&A and organic growth, Axalta has doubled the revenue of its Industrial Coatings business over the last five years from $500mn to $1bn. With plenty of “white space” for continued growth, the company aims to double their revenue base again over the next five. Currently, Axalta is targeting sales growth in the mid-single-digit range from its existing business, plus significant M&A growth. Much of this inorganic growth will...
• White space opportunities also exist in Transportation Coatings. Despite holding a number two position in the light vehicle coatings market, Axalta sees additional “white space” for expansion. The end goal is a 20% market share, which reflects additional revenue opportunity of $1bn. Within light vehicle coatings, Axalta plans to achieve growth by focusing on underserved OEMs, regions, and products, as well as increasing content per vehicle. With regard to the former...
• We maintain a Hold rating with a price target of $31. Our target implies shares offer rather limited potential for upside, absent the rekindling of large-scale M&A discussions. Axalta trades on par with closest peer PPG based on a 2018 EBITDA multiple and retains a P/E multiple premium of 6.3x. Given Axalta’s elevated exposure to autos and more limited balance sheet flexibility, 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 $30. Using our relative P/E framework wherein we apply a 30% premium to the S&P500 multiple, we calculate warranted value of $31 per AXTA share.
(Please see full report for details)
Out of the Blocks Well in 2018
• Growth is tracking better to start the year. We attended Axalta’s investor day in NY where CEO Charlie Shaver and the balance of senior management updated us on strategy, execution, and capital deployment. The company affirmed financial goals, but indicated that sales and EBITDA are tracking ahead of plan through February. Management acknowledged potential for one or two large consolidating deals in the global coatings industry. We continue to believe that Axalta may play a role here, although it’s not clear to us that the probability of a large M&A transaction is any higher today than it was yesterday. In the meantime, we expect Axalta to execute on its $200mn restructuring effort (Axalta Way II) while deploying the majority of FCF toward bolt-on acquisitions. Opportunities include the ongoing roll-up of industrial coatings as well as selected auto refinish coatings targets in China, where Axalta sees its “single best growth opportunity”. In contrast, management expressed little interest in additional debt reduction or establishment of a dividend. On balance, we see Axalta as on a better growth trajectory at this juncture, having emerged from a disappointing stretch in auto OEM and refinish coatings through the first nine months of 2017.
• 2018 targets affirmed with a strong start to the year. CFO Robert Bryant expanded upon the key drivers of financial performance, described as the Axalta growth algorithm. This was displayed as an earnings framework driven by low- to mid-single digit organic volume, plus low-single digit pricing, inflation “plus” productivity, and mid-single digits of accretive M&A. Integral to this inflation “plus” productivity is Axalta Way II, which is expected to deliver another $200mn in savings (same as Axalta Way I). For 2018, the company...
• The Auto Refinish Coatings market is still positioned to grow. Axalta affirmed its stance that the refinish business is still ripe for growth, despite the growing trend of automation and driver assist technologies. Despite steady advancement of these technologies, Axalta noted an increase in both the frequency and severity of auto accidents over the past two years. As a result, net insurance claims are expected to grow, not only in the US, but also in the UK and Germany at rates of...
• Industrial Coatings revenue expected to double again. Through a combination of M&A and organic growth, Axalta has doubled the revenue of its Industrial Coatings business over the last five years from $500mn to $1bn. With plenty of “white space” for continued growth, the company aims to double their revenue base again over the next five. Currently, Axalta is targeting sales growth in the mid-single-digit range from its existing business, plus significant M&A growth. Much of this inorganic growth will...
• White space opportunities also exist in Transportation Coatings. Despite holding a number two position in the light vehicle coatings market, Axalta sees additional “white space” for expansion. The end goal is a 20% market share, which reflects additional revenue opportunity of $1bn. Within light vehicle coatings, Axalta plans to achieve growth by focusing on underserved OEMs, regions, and products, as well as increasing content per vehicle. With regard to the former...
• We maintain a Hold rating with a price target of $31. Our target implies shares offer rather limited potential for upside, absent the rekindling of large-scale M&A discussions. Axalta trades on par with closest peer PPG based on a 2018 EBITDA multiple and retains a P/E multiple premium of 6.3x. Given Axalta’s elevated exposure to autos and more limited balance sheet flexibility, 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 $30. Using our relative P/E framework wherein we apply a 30% premium to the S&P500 multiple, we calculate warranted value of $31 per AXTA share.
(Please see full report for details)
