|Shares Out. (in M):||243||P/E||0.0x||0.0x|
|Market Cap (in $M):||5,985||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||3,396||EBIT||765||1,027|
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Huntsman Corporation (HUN) is a global chemicals producer that will benefit from near-term company specific catalysts as well as macro tailwinds. We like HUN for the following reasons: 1) HUN’s largest segment – Polyurethanes – is a strong, growing business that provides exposure to improving US housing and construction cycles which rely on the MDI chemical; 2) Recent trough purchase of Rockwood TiO2 assets provides for significant synergies with HUN’s TiO2/Pigments segment, cyclical upside to global construction and a catalyst in the form of a partial IPO; 3) Successful restructuring plans have already provided $180mm in run-rate benefits with another $60mm planned; 4) Prior skepticism of management has made HUN an unloved name in the otherwise very strong chemicals space; 5) Change in leadership over time is expected as Founder Jon Huntsman Sr., the 76-yr old Chairman who built the company, gives way to CEO Peter Huntsman, who is focused more on creating shareholder value; 6) Play on global GDP growth which may have upside to Bloomberg Street estimates of ~3% (2015/2016); and 7) Low risk of a US or Euro-zone recession in 2014 provide limited fundamental downside to HUN’s core business. HUN’s current multiple (8 – 9x 2015 P/E and < 6x 2015 EBITDA) underappreciates the company’s transition and growth prospects, while our sum of the parts valuation results in a price target of $42 (~70% upside).
HUN is a differentiated chemicals producer with five major segments across diversified end markets.
HUN has several tailwinds and expected catalysts that are likely to drive revenue growth, EBITDA margin expansion and trading multiple expansion over the next few years.
Summary Financials and Projections (assuming ROC deal closes in 2H 2014)
The key assumptions in the above projections – which reflect management’s 3 year target but do not reflect peak segment margins - include the Rockwood deal closing without material divestitures, continued US and global GDP growth in the ~3% range, an improvement in the TiO2 sector (from trough levels) and the achievement of synergy and restructuring targets. Importantly, to date HUN has realized more improvements than initially targeted under its $240mm restructuring plan begun in 2012/13, and none of these self-help initiatives impacted the Pigments division.
Given the mix of differentiated segments with varying growth prospects and relative attractiveness, the best way to value Huntsman is to create a SOTP using peers with similar businesses. Our price target is based on 2016 segment EBITDAs capitalized relative to peer multiples (in most cases at a 10 – 15% discount to those peers current year forward multiples). The result is an aggregate multiple of 7.6x EBITDA (which compares to HUN’s trading range over past 5 years of approximately 5 – 8x forward EBITDA). We believe that a multiple near the top of this trading range – and still at a discount to peers – is not ambitious given the improved fundamentals, on-going restructuring efforts and imminent separation of HUN’s lowest multiple segment (TiO2).
As seen below, the year-end 2015 price target of $46 (based on 2016E results) is discounted back to a year-end 2014 fair value target. The resulting target price is $42. The $42 target is less than 12x our 2016 EPS estimate and 14x our 2015 estimate – which is not a stretch multiple.
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