08.05.18
Huntsman Corporation (HUN, Buy, $43 PT)
Demilec Deal Delivers a Dime in 2019E
• Huntsman’s acquisition of Demilec makes strategic sense to us. Huntsman will acquire Demilec, a North American formulator of spray polyurethane foam (SPF) insulation, from Sun Capital Partners for $350mn in cash or 4.5% of the company’s equity market capitalization. We view the deal as a good strategic fit that is consistent with Huntsman’s long standing strategy of upgrading the company’s MDI (urethane intermediate) product line to feature a higher proportion of value-added systems vs. straight commodity sales. As we discuss below, we like Demilec’s growth and margin prospects and expect the deal to close at mid-year with moderate accretion to EPS.
• Demilec delivers double-digit growth with premium margins. As shown in Figure 1, insulation is the largest application for MDI at an estimated 36% of industry sales in 2018E. Typically, the largest wedge of a demand pie is a more mature, slower growing segment. In the case of SPF, we believe the opposite is true. Whereas MDI demand has been growing 5.5-6.0% globally, we estimate that SPF has been growing at a high-single-digit rate due its superior insulation characteristics, greater energy efficiency, and higher value in use. Huntsman’s ongoing mix upgrade to so-called “systems” from commodity sales of MDI has positive implications for segment EBITDA. According to Huntsman, Demilec offers double-digit EBITDA growth prospects at a margin of 25% vs. Huntsman’s segment average of 15.8% over the past five years and our forecast of 18.7% in 2018E.
• Valuation looks decent and in line with Accella. The purchase price of $350mn represents 2.06x annual sales of $170mn and 11.5x estimated 2018 EBITDA of $30mn on a pre-synergy basis. We estimate synergies of $16mn from a combination of raw material costs and back office functions, so on a post-synergy basis the multiple would decline to 7.5x EBITDA. We note that these EBITDA multiples are quite similar to what...
• We increase our 2019 EPS estimate by $0.10 to $2.95. As shown in Figure 2, we estimate that the Demilec transaction will be modestly accretive to earnings in the “stub” year of 2018, followed by more meaningful EPS accretion of $0.10 in 2019E. As a result, we maintain our above-consensus EPS estimate of $2.90E for 2018, although it now appears more conservative in our view. Looking ahead to 2019, we increase our EPS estimate by…
• We consider Polyurethanes (PU) to be under-appreciated by the Street. The apparent capitalization of Huntsman’s PU segment earnings at a pure commodity multiple is misguided in our opinion for three reasons: (A) MDI, the key urethane intermediate in Huntsman’s PU business, continues to grow at double the rate of GDP, as it has for many years, (B)...
• Is Huntsman over-earning as a company? We think not. Thanks to cyclically strong margins, Huntsman’s MDI business has certainly been “overearning” by perhaps ~$120mn in 2H17. Lest one conclude that Huntsman itself is overearning however, we would point out that the real commodity in the company’s Polyurethanes segment, MTBE, has been tracking near breakeven EBITDA, which is ~$120mn below our estimate of a normalized contribution. Elsewhere in Huntsman’s portfolio...
• We rate HUN shares Buy and maintain our target. Our target of $43 suggests upside potential of 35% including a dividend yield of 2.0%. HUN shares trade at 11.1x our EPS estimate of $2.90 for 2018, ex the value of Huntsman’s 53% stake in Venator (VNTR). 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 9.7x, which represents a 40% discount to the average of 16.3x for the 18 stocks in our coverage universe. 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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Demilec Deal Delivers a Dime in 2019E
• Huntsman’s acquisition of Demilec makes strategic sense to us. Huntsman will acquire Demilec, a North American formulator of spray polyurethane foam (SPF) insulation, from Sun Capital Partners for $350mn in cash or 4.5% of the company’s equity market capitalization. We view the deal as a good strategic fit that is consistent with Huntsman’s long standing strategy of upgrading the company’s MDI (urethane intermediate) product line to feature a higher proportion of value-added systems vs. straight commodity sales. As we discuss below, we like Demilec’s growth and margin prospects and expect the deal to close at mid-year with moderate accretion to EPS.
• Demilec delivers double-digit growth with premium margins. As shown in Figure 1, insulation is the largest application for MDI at an estimated 36% of industry sales in 2018E. Typically, the largest wedge of a demand pie is a more mature, slower growing segment. In the case of SPF, we believe the opposite is true. Whereas MDI demand has been growing 5.5-6.0% globally, we estimate that SPF has been growing at a high-single-digit rate due its superior insulation characteristics, greater energy efficiency, and higher value in use. Huntsman’s ongoing mix upgrade to so-called “systems” from commodity sales of MDI has positive implications for segment EBITDA. According to Huntsman, Demilec offers double-digit EBITDA growth prospects at a margin of 25% vs. Huntsman’s segment average of 15.8% over the past five years and our forecast of 18.7% in 2018E.
• Valuation looks decent and in line with Accella. The purchase price of $350mn represents 2.06x annual sales of $170mn and 11.5x estimated 2018 EBITDA of $30mn on a pre-synergy basis. We estimate synergies of $16mn from a combination of raw material costs and back office functions, so on a post-synergy basis the multiple would decline to 7.5x EBITDA. We note that these EBITDA multiples are quite similar to what...
• We increase our 2019 EPS estimate by $0.10 to $2.95. As shown in Figure 2, we estimate that the Demilec transaction will be modestly accretive to earnings in the “stub” year of 2018, followed by more meaningful EPS accretion of $0.10 in 2019E. As a result, we maintain our above-consensus EPS estimate of $2.90E for 2018, although it now appears more conservative in our view. Looking ahead to 2019, we increase our EPS estimate by…
• We consider Polyurethanes (PU) to be under-appreciated by the Street. The apparent capitalization of Huntsman’s PU segment earnings at a pure commodity multiple is misguided in our opinion for three reasons: (A) MDI, the key urethane intermediate in Huntsman’s PU business, continues to grow at double the rate of GDP, as it has for many years, (B)...
• Is Huntsman over-earning as a company? We think not. Thanks to cyclically strong margins, Huntsman’s MDI business has certainly been “overearning” by perhaps ~$120mn in 2H17. Lest one conclude that Huntsman itself is overearning however, we would point out that the real commodity in the company’s Polyurethanes segment, MTBE, has been tracking near breakeven EBITDA, which is ~$120mn below our estimate of a normalized contribution. Elsewhere in Huntsman’s portfolio...
• We rate HUN shares Buy and maintain our target. Our target of $43 suggests upside potential of 35% including a dividend yield of 2.0%. HUN shares trade at 11.1x our EPS estimate of $2.90 for 2018, ex the value of Huntsman’s 53% stake in Venator (VNTR). 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 9.7x, which represents a 40% discount to the average of 16.3x for the 18 stocks in our coverage universe. 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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