June 24, 2021 - 10:13am EST by
2021 2022
Price: 88.41 EPS 4.87 5.84
Shares Out. (in M): 62 P/E 18.2 15.4
Market Cap (in $M): 5,481 P/FCF 18.2 15.4
Net Debt (in $M): 1,386 EBIT 590 670
TEV (in $M): 6,867 TEV/EBIT 11.7 10.6

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Summary of Investment Thesis:  (i) high margin business in a well-structured industry, provides mission critical ingredients/additives into attractive growing and defensive end markets of Personal Care, Pharma, Coatings, (ii) strong Board of Directors following 2019 proxy fight, (iii) new CEO Guillermo Novo took over in January 2020, brought in a new senior management team, successfully completed bottom line cost/operating turnaround (modeled on his experience at Air Products), now focused on reinvigorating top line growth both organically and via M&A, (iv) clean balance sheet, (v) strategic asset, previously reported acquisition target of Croda (CRDA LN)


  • Company has undergone decade-long transformation from messy ~$9B revenue conglomerate to specialty portfolio today with $2.45B of revs (midpoint guidance); along the way, buying, selling and spinning (Valvoline) assets was emphasized over fixing/optimizing operations; material capital was also used to de-lever and buyback a lot of stock
  • Prior CEO had mandate to sell remaining non-core assets, restructure costs and integrate the go-forward businesses; his mixed performance and margin target miss led to activist involvement and a proxy fight (see proxy filings, current Board and holders list) that resulted in an upgraded Board and ultimately a CEO change
  • Guillermo Novo initially joined the Board and thereafter was named CEO:
    • Novo is a well-respected long-tenured executive; he played a senior role in the Air Products (APD) turnaround under Seifi Ghasemi and is now applying that same playbook to ASH:  replaced business unit heads, changed from a top down matrix management model to one that pushes P&L control / accountability / incentives to the business unit level
    • When APD spun out its Versum (VSM) unit, Novo was named CEO; during his tenure at VSM, he successfully executed, reinvigorated growth, drove material margin expansion and ultimately sold the company for $6.5B in a bidding war between Entegris and Merck KGaA
  • Business summary:
    • ASH ingredients / additives / specialty chemicals are mission critical to its customer’s end-product function yet represent a small % of that end-product’s COGS; in its regulated Pharma and Personal Care end-markets, ASH ingredients are generally specified in with long product cycles, intellectual property support and high switching costs
    • Operates in a well-structured industry with ASH, BASF, and parts of former DWDP holding a large combined market share
    • Key end-markets/examples:
      • Pharma:  key product is excipients in pills used for binding/disintegration/time release for solubility/digestion/assimilation; best business; sells into large pharma as well as generics; long product cycle, spec-ed in and regulated
      • Personal Care:  various ingredients for skin, hair, teeth applications, sold to large multinationals and regionals; need to be able to supply globally across plant network; spec-ed in/predictable/sticky/regulated, shorter formulation product cycles than in Pharma segment
      • Coatings:  market leader providing rheology (flow) and thickness control; critical supplier to all global coatings/paint players
    • Raw material inputs are varied but largely non-petrochemical based and ASH historically has exhibited price power to offset raw material changes; importantly, from an ESG perspective, its key cellulosics-based ingredients are naturally derived from wood/cotton pulp/linters; this is important also to support customer label claims 
  • Prior strategic interest:  in early 2018; Reuters and Bloomberg reported that UK chemical company Croda had talks to acquire ASH;  Croda (>$15B TEV, trades at 22x EBITDA), is widely viewed among the best managed specialty chemical/ingredients companies in the world and serves similar end-markets; Croda’s comparable business units have mid-high 30s EBITDA margins
  • Since early 2018 when talks reportedly ended, ASH sold its composites business for $1B, sold a smaller commodity business for $100M and is in the process of selling its adhesives business (see below); the remaining core ASH is now a smaller enterprise and a pure play specialty ingredients company, potentially making it a cleaner and easier target


  • Strong business, mid-turnaround:
    • Since Novo joined, the business has stabilized, operations through COVID were excellent, and the business has experienced an organic growth inflection in several key end-markets
    • R&D function and new product commercialization has been revitalized and should lead to enhanced organic growth starting in 2022 driven by recent wins
    • Pharma has been strong as has Coatings; Personal Care is the area which has seen uneven results driven by (i) some legacy business losses and (ii) delayed COVID re-openings in Europe and other parts of the world (~70% of ASH revenue is non-US)
    • Most recent quarter was a minor setback largely driven by (i) effects of Winter Storm Uri and (ii) COVID-driven supply chain/shipping issues; these were well explained by management and comparable companies all faced similar issues; ASH reiterated annual guidance and framed the issue as supply/timing driven while underlying demand remains strong
  • Margin upside:  (i) targeting 25%+ EBITDA, (ii) self-help from identified gross savings, $25M in SG&A and $50M in COGS, (iii) inherent operating leverage from incremental growth
  • Pending sale of Adhesives business:  recently announced strategic alternatives for this asset; very good business with mid-high 20s EBITDA margins; is a standalone operation within ASH and the last non-core, non-additives asset; I estimate gross proceeds of $1.1-$1.5 billion; proceeds to be used for additional bolt-on M&A and buybacks 
  • Bolt-on M&A:  recently closed acquisition of the Personal Care assets of Schulke & Mayr; attractive, accretive deal, paid ~$310M and I estimate $30-$35M of acquired EBITDA; complementary additives business, growth and margin accretive, further expands ESG offering
  • Upcoming investor day:  first under Novo and his new team to present the revamped story to the street, showcase new products and potentially set new financial targets
  • Valuation:  stock trades for 10.6x FY22 (September) EBITDA and 15.4x EPS (good proxy for FCF ~6% yield); leverage <2.5x; numbers are pro forma for Schulke acquisition and still include the Adhesives business
  • Stock trades at a ~5x discount EBITDA multiple to its specialty peers; I believe that continued performance, increased consistency and organic growth momentum will close the gap; assuming a 14.5x EBITDA multiple on forward numbers = ~$145 stock, up >60% on a 1-2 year horizon with upside optionality if ASH is ultimately acquired

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Investor day sets increased growth and margin targets; adhesive business sold; additional bolt-on acquisitions; company attracts strategic interest

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