This idea fits best with personal accounts or small funds due to low liquidity in the stock

Summary

BEWi is an integrated player in the EPS industry with a strong track record of creating shareholder value through M&A. The business is still controlled by the founding family, which is involved in the daily operations. Due to its recent second-tier listing (Merkur), low liquidity and small market cap it has not gained massive attention yet, only trading at 11x EBITA 2020. Catalysts will be continued strong results throughout 2020 so investors gain confidence in the new company, success with recycling, and listing on the main stock exchange in Norway, Oslo Børs.

Background

BEWi was founded by the Bekken and Witzøe family back in 1980 in Frøya in Norway. The initial focus was on styrofoam packaging for the salmon industry, still a key part of the business today. Over the last 40 years, BEWi has grown through a series of acquisitions into the pan European company it is today, dominating the EPS market in Northern Europe. The business is still controlled by the Bekken family with ~60% ownership and the second generation has now taken over the business.

Company overview

BEWi is a fully integrated expanded polystyrene (EPS) producer with operations in Scandinavia, Netherlands, Portugal, France and Germany, with the latter two being JVs where BEWi owns 34%.

The upstream business, raw, consist of two EPS beads manufacturing plants, one located in Netherland and one in Finland. These serve the downstream businesses, insulation and packaging & components, as well as external sales to other EPS producers. This is a traditional process industry where BEWi buys styrene from the likes of Shell, Total, Ineos and converts that to polystyrene. This is then transported to its conversion sites located in strategic locations close to customers before it is expanded.

The downstream operations are located close to key customers as once the polystyrene is expanded it becomes very voluminous and transportation cost increase. To put some perspective on this the finished EPS product consist of 98% air. This serves as a great entry barrier for BEWi because it is hard for other companies to compete once BEWi is located close to key customers. This is particularly true for the Norwegian fish boxes operations where BEWi is located very close to the fish slaughter houses.

Although BEWi has a very diversified customer base with no customer accounting for more than 5%, it predominantly makes its earnings from the Norwegian fish boxes and insulation in Netherland. The insulation business in Netherland was acquired when BEWi acquired Synbra in 2018 and it has a very strong market position. In this market, Synbra has developed more of a solutions business than being solely an insulation supplier. The products are focused on saving the builders time and effort, therefore generating high margins (~20% EBITDA).

Historic M&A

From 2012 to 2019, BEWi grew its revenues by 45% CAGR primarily through aggressive M&A. The most important acquisitions has been Styrochem in 2014 which made BEWi integrated upstream, and Synbra in 2018 that doubled the business with the expansion to Europe. These acquisitions have been done at low multiples (5-6x EBITDA before synergies) and most importantly the acquired businesses have delivered strong results post integration.

The company is targeting a total of 10% revenue growth going forward, with the majority from M&A. This sounds reasonable based on the track record and that the industry is still fragmented.

Recycling

Ok, so at the end of the day BEWi is a plastic producer and everyone has strong opinions about plastics and how bad it is. The interesting thing is that plastics is actually a great product that is difficult to replace. Considering the whole value chain (including potential product damages, like spoiled food) there is evidence that using plastics vs alternatives reduces CO2.

The main problem with plastics is that only a small portion is recycled today and if it gets into the environment it does not breakdown. BEWi is investing significant amounts of money into this and has already established infrastructure to recycle 20k tons of EPS annually. By 2021, the company has a goal of recycling 60k tons and generating 10% EBITDA margins in this business. 60k tons is a magic number for BEWi because out of the 180k tons it produces annually, only 60k tons gets put into the economy and can therefore be recycled. The rest is put into components and insulation with a lifetime of ~100 years. This means that by next year BEWi will recycle all the EPS it puts into the economy.

Financials

BEWi has a historic growth rate of 45% CAGR from 2012 and 2019, primarily driven by acquisitions. Organic growth is difficult to calculate as its topline is linked to oil price and the company does not give out volumes. Margins have been fairly stable but improving due to scale. It is important to keep in mind that BEWi has a relatively small fixed cost base, so do not think of it as a large chemical company or worse, a cement player.

Margins have tended to be around 10% on EBITDA and 6-8% on EBITA. It has a large amortization of acquired intangible charge that makes EBIT useless. Also measuring margins in % of topline does not provide much information, as the topline fluctuates so much dependent on oil price. It is better to look at it on a EBITDA / ton, but unfortunately the company does not report enough information for us to track this over time.

The goal for the company is to grow its topline by 10% p.a., mainly driven by M&A but also some organic growth (such as a new fish box plant in Senja next to SalMar).

Valuation

At 20.68 NOK per share BEWi trades at 10.8x 2020 EBITA (and 6.6x EBITDA), including IFRS 16 debt. Comparable companies trade at closer to 15x EBITA 2020.