Vertical Research Partners: Celanese Corporation 3Q17 Results

Celanese Corporation (CE: Hold, $105 PT) 
Acetyls Drive Modest EPS Upside; EBIT 2% Better Apples-Apples

• Operating results slightly better as adjusted for Harvey. CE posted 3Q17 adjusted EPS of $1.93 ex items, surpassing our $1.88E and consensus of $1.91. Among various items, Celanese’s adjusted EPS excludes $11mn of direct costs (fixed overhead, clean-up and re-start related costs), primarily associated with Hurricane Harvey, which is equivalent to $0.07 in EPS assuming an applicable tax rate of 16%. In addition, management commentary indicates a lost sales opportunity and higher costs associated with contingency plans to be ~$20-30mn of segment income in the quarter. As a reminder, we had previously reduced our 3Q17 EPS estimate by $0.04 from $1.92 on account of estimated headwinds related to Hurricane Harvey and the subsequent shut down of Celanese’s Clear Lake, Bishop and, Bay City facilities. Relative to our model, core EBIT of $345 million exceeded our forecast by $1 million, but would have been ~2% better on an apples-apples basis. On a segment basis, operating EBITDA Acetyl Intermediates (AI) outpaced our forecast, while Industrial Specialties (IS) came in light and Advanced Engineered Materials (AEM) and Consumer Specialties (CS) trended in line. Net debt increased $124mn q-q as CE repurchased ~2mn shares for $200mn in 3Q17, making $500mn YTD. Commentary suggests to us that ongoing repurchases are unlikely in 4Q17.

• CE endorses 11% EPS growth in 2017 followed by +9-13% in 2018; FCF looks weaker for 2017. Management expressed confidence in achieving the higher end of the company’s existing EPS growth range of 9–11%, which suggests EPS of approximately $7.34 vs. our $7.35E and consensus of $7.31. This guidance implies 4Q EPS of ~$1.81 vs. our $1.87 and consensus of $1.81. Celanese now sees 2017 FCF of $800mn, down $50mn from $850mn previously as a function of higher trade working capital due to higher sales. Looking ahead, Celanese’s segment-based outlook for 2018 suggests an EPS step up of $0.70-0.90 vs. 2017 for an adjusted EPS growth range of +9-13%, a touch better than our 10.2% expectation. AEM is meant to drive the lion’s share of EPS growth in 2018 at… 

• Acetyls delivers impressive upside. AI has been a significant driver of positive earnings variance over the past few quarters, both on price and margin, and this trend continued as EBIT of $134mn came in well ahead of our $109mn. Management highlighted better acid pricing in Asia and global volumes as reasons for the strong performance. This business saw the brunt of our pre-release estimate revisions given the downtime at Clear Lake, and we suspect that a majority of the $11mn in direct costs that CE incurred were within this segment. That said, even adjusting for any cost issues with Harvey, results would have still beaten our estimate. The one headwind associated with the Acetyl Chain on the quarter was lower margins in Industrial Specialties, which came in 280bps below our expectation resulting in a variance of $5mn…  

• AEM EBIT a touch light on margins. Despite stronger sales and EBITDA, core EBIT for the business was a $3mn headwind vs. our estimate due to higher D&A. Segment EBIT margin declined 770bps y-y to 27.1%, mainly on expected mix effects related to acquisitions, yet missed our forecast by 210bps. Excluding equity income, margins came in at 18.8%, which is the first sub 20% margin performance for AEM since 4Q15 despite certain adjustments to remove Harvey-related costs. We have been anticipating margin degradation given the acquisitions of SO.F.TER (Italy) and Nilit (Israel), and the higher D&A may be the result of higher deal-related amortization. That said…  

• Consumer looks stable.  At $79mn in adjusted EBIT, results in acetate tow were a slight miss vs. our estimate of $81mn. That said, performance was flat sequentially, which is in line with management’s prior guidance calling for results to stabilize at or near this level through 2018. Year over year comps were easier than last quarter as demand had been pulled forward into 2Q16 from 3Q16. In this context volume performance vs. 2Q17 and the sequential volume deceleration is perhaps a bit disappointing. However, EBIT margin of 42.2% beat our 41.5% by 70bps. Regarding the JV deal with Blackstone, Celanese pointed to a final EU regulatory decision in Spring 2018.  

• We rate CE shares Hold with a price target of $105. Our PT suggests shares are fairly valued after considering 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 $135. Using our relative valuation framework, our P/E multiple implies a fair value of $96 while our EV/EBITDA implies a fair value of $85 per CE share. 

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