08.12.18
Celanese Corporation (CE: Hold, $114 PT)
Filter Tow JV Goes Up in Smoke
• Europe kills Celanese’s planned filter tow JV with Blackstone. After the close on Monday, Hold-rated Celanese announced that it has abandoned its merger agreement with Blackstone’s Rhodia Acetow business. The two parties were unable to reach an agreement with the European Commission on acceptable conditions to allow the proposed joint venture to proceed. We are not terribly surprised by the outcome as we had viewed anti-trust risk in Europe as a formidable deal risk from day one. Since then, European regulators have taken a harder line on several cross-border M&A transactions, including Bayer-Monsanto, Praxair-Linde, and Tronox-Cristal. The good news for Celanese is that impact to consensus earnings expectations is likely to be muted. We had not incorporated the Blackstone JV deal into our financial model, due in part to uncertainty of closing (and timing thereof) and we suspect that is the case with several other analysts as well. Meanwhile, as we discuss below, we believe the company’s earnings outlook is trending nicely overall, aided by recent strength in acetyls.
• Near-term reaction: shares could come under pressure as JV fears are confirmed. While we believe that our anti-trust concerns were shared by many investors, we would nevertheless expect CE shares to trade lower in Tuesday’s session as several deal-related benefits – industry consolidation, EPS accretion, financial flexibility and new strategic options – will now not be available to Celanese, at least as previously contemplated. To a smaller degree, we suspect that shares of Buy-rated Eastman Chemical could ease in sympathy, at least on a relative basis due to...
• Longer term key: how is Celanese’s portfolio strategy likely to evolve? While consummation of the Blackstone JV would have been nice to see, management has other strategic options, such as the potential to separate one or both of the Materials Solutions businesses, Advanced Engineered Materials (AEM) and Consumer Specialties (CS) form the two Acetyl Chain lines, Acetyl Intermediates (AI) and Industrial Specialties (IS). We see several factors that would facilitate a spin-off scenario...
• We raise our 2018 EPS estimate by $0.15 or 1.8%. We increase our 2018 EPS estimate to $8.65 from $8.50, primarily as a result of recent strength in acetic acid and derivative as discussed in our most recent edition of Commodity Chemical Calculus (click here). We note that Celanese management increase its 2018 EPS growth outlook back on 28 February to a new range of +12-16% from a previous range of +10-14%. Our new EPS estimate of $8.65 reflects EPS growth of more than 15% relative to $7.50E in 2017. Likewise, our 2019 estimate rises to $9.25 from $9.15.
• We rate CE shares Hold and trim our price target by $2 to $114. Our revised target suggests shares offer moderate upside of 9-10%, including a dividend yield of 1.7%. As a reminder, we value Celanese based on an average of three methodologies; DCF analysis, a relative P/E framework, and a relative EV/EBITDA framework. Our DCF suggests a warranted stock price of $152. Using our relative valuation framework, our P/E multiple implies a fair value of $102 while our EV/EBITDA implies a fair value of $87 per CE share.
(Please see full report for details)
Filter Tow JV Goes Up in Smoke
• Europe kills Celanese’s planned filter tow JV with Blackstone. After the close on Monday, Hold-rated Celanese announced that it has abandoned its merger agreement with Blackstone’s Rhodia Acetow business. The two parties were unable to reach an agreement with the European Commission on acceptable conditions to allow the proposed joint venture to proceed. We are not terribly surprised by the outcome as we had viewed anti-trust risk in Europe as a formidable deal risk from day one. Since then, European regulators have taken a harder line on several cross-border M&A transactions, including Bayer-Monsanto, Praxair-Linde, and Tronox-Cristal. The good news for Celanese is that impact to consensus earnings expectations is likely to be muted. We had not incorporated the Blackstone JV deal into our financial model, due in part to uncertainty of closing (and timing thereof) and we suspect that is the case with several other analysts as well. Meanwhile, as we discuss below, we believe the company’s earnings outlook is trending nicely overall, aided by recent strength in acetyls.
• Near-term reaction: shares could come under pressure as JV fears are confirmed. While we believe that our anti-trust concerns were shared by many investors, we would nevertheless expect CE shares to trade lower in Tuesday’s session as several deal-related benefits – industry consolidation, EPS accretion, financial flexibility and new strategic options – will now not be available to Celanese, at least as previously contemplated. To a smaller degree, we suspect that shares of Buy-rated Eastman Chemical could ease in sympathy, at least on a relative basis due to...
• Longer term key: how is Celanese’s portfolio strategy likely to evolve? While consummation of the Blackstone JV would have been nice to see, management has other strategic options, such as the potential to separate one or both of the Materials Solutions businesses, Advanced Engineered Materials (AEM) and Consumer Specialties (CS) form the two Acetyl Chain lines, Acetyl Intermediates (AI) and Industrial Specialties (IS). We see several factors that would facilitate a spin-off scenario...
• We raise our 2018 EPS estimate by $0.15 or 1.8%. We increase our 2018 EPS estimate to $8.65 from $8.50, primarily as a result of recent strength in acetic acid and derivative as discussed in our most recent edition of Commodity Chemical Calculus (click here). We note that Celanese management increase its 2018 EPS growth outlook back on 28 February to a new range of +12-16% from a previous range of +10-14%. Our new EPS estimate of $8.65 reflects EPS growth of more than 15% relative to $7.50E in 2017. Likewise, our 2019 estimate rises to $9.25 from $9.15.
• We rate CE shares Hold and trim our price target by $2 to $114. Our revised target suggests shares offer moderate upside of 9-10%, including a dividend yield of 1.7%. As a reminder, we value Celanese based on an average of three methodologies; DCF analysis, a relative P/E framework, and a relative EV/EBITDA framework. Our DCF suggests a warranted stock price of $152. Using our relative valuation framework, our P/E multiple implies a fair value of $102 while our EV/EBITDA implies a fair value of $87 per CE share.
(Please see full report for details)
