Description

Luxfer Holdings (NYSE: LXFR)

Overview:

Luxfer is an obscure small cap materials conglomerate trading at a low double digit multiple of earnings in the early innings of a new management team led turnaround that should drive a multiyear period of earnings growth. Intelligent capital allocation combined with a 3.5% dividend yield can result in healthy multi-year IRRs from current levels for small cap value investors.

Business Description:

Luxfer’s business involves the manufacture of technologically advanced, lightweight, high-strength, corrosion-resistant alloys, composites and specialty materials for a wide variety of niche end markets and applications ranging from aerospace, industrial, defense, healthcare, automotive, public safety, and consumer electronics.

Luxfer reports with two segments, Elektron and Gas Cylinders. Each segment comprises ~50% of consolidated revenue; Elektron is ~2/3 of total EBITDA.

Elektron—

• Magnesium alloys:  for aerospace, automotive, biomedical devices

• Zirconium- based chemicals:  for automotive and industrial catalysis and water treatment

• Magtech: magnesium based heating pads

• Graphic Arts: magnesium, copper and brass plates for packaging, labels, covers and plaques

Gas Cylinder—

• Composite Cylinders for firefighter oxygen tanks

• Aluminum Cylinders: healthcare, fire extinguishers, beverage, scuba diving

• Alternative Fuel Cylinders: for CNG and hydrogen used in Buses, Trucks, Forklifts

• Superform Components: complex sheet based components from aluminum, magnesium and titanium for auto, aerospace etc.

Opportunity:

Luxfer was built through a series of mergers and acquisitions over a 20 year period (although some of these businesses date back to the 1800s). The result is 20 plants in 7 countries as well as 1,800 employees supporting $400-450m in revenue. This fragmented and inefficient organization is the product of the prior management team led by Brian Purves based in England. Prior management was, in my opinion, too slow to adopt modern management techniques as well as adapt to changing market dynamics.

Following the retirement of long time CEO Brian Purves and CFO Andy Beaden during 2017 the board decided to bring in a younger US based CEO in Alok Maskara. Alok was a business head at Pentair, following time at GE and McKinsey. Alok has an ambitious plan to improve Luxfer.

• ROIC and margin improvement through plant consolidation and lean manufacturing

• Since joining 6/1/17 Alok has already completed a plant closure (Luxfer Magtech in Long Island, NY)

• Intelligent capital allocation through M&A and portfolio rationalization through divestiture

• Acquired the Specialty Metals business from ESM Group

• Continued dividend

• Focus on targeted growth opportunities

Additionally, LXFR is making some changes that may make it more attractive as an investment to US investors.

• In December 2017 they collapsed the ADR structure into common shares

• They plan to convert to US GAAP accounting and eventually seek to be listed on the R2K

• US based management team of Alok, new CFO Heather Harding and others

Valuation:

• $.50 annual dividend out of roughly ~$1-1.30 in normalized free cash flow on a $14 stock.  

• P/E 14x 2017 consensus earnings and 11x  2018 consensus.

• ~10x 2017 EV/(EV/EBITDA-CX)

• Moderate leverage (1.65x net levered, 2x gross levered).

Why the opportunity exists:

• Shares have languished for years in ADR obscurity, historically UK based management team did little IR, and of course the recent multi-year period of unexciting business results. Hopefully many of these elements change over next few years and shares can re-value.

Catalyst

Earnings growth  

MD&A + dividend

Greater awareness of Luxfer by US investors