Description
Setup
The company, which was once a mini-industrial conglomerate, has taken several steps over the past 3-5 years that suggest the company will be liquidated piecemeal. In 2020 they sold their personal care films business, in 2021 they sold their stake in Kaleo, a successful venture healthcare company, last year they annuitized their pension plan, John Gottwald, the long time CEO and Chair retired, in September of '23 they sold their Brazilian business, and in October of '23 they filed an 8k with golden parachutes for the management team. We believe the two remaining businesses, after netting out debt, are worth $11-13 before any tax leakage.
Description (from the company's most recent 10q)
Tredegar Corporation is an industrial manufacturer with three primary businesses: custom aluminum extrusions for the North American building and construction ("B&C"), automotive and specialty end-use markets through its Aluminum Extrusions segment; surface protection films for high-technology applications in the global electronics industry through its PE Films segment; and specialized polyester films primarily for the Latin American flexible packaging market through its Flexible Packaging Films segment. With approximately 1,800 employees, the Company operates manufacturing facilities in North America, South America, and Asia.
Overview
The Gottwalds have a storied history down in Richmond, VA and have created significant shareholder value at two other public companies: Albermarle and Neumarket (20% and 13% 20 year CAGRs respectively). Tredegar, for whatever reason (probably business quality) has been the ugly stepchild of the bunch for decades. It is our contention that with John stepping down the wheels are in motion for a sale of the company, most likely in parts. John has a reputation as being tough, hands-on to the point of micromanagement, and demanding. In our experience, people like that-especially founding family members-don't truly want the company to thrive without them. As such, we believe he chose a successor, John Steitz, with a PE background to oversee the dismantling of the enterprise.
Thesis
The thesis here is fairly simple. The company is down to two businesses--one lousy (films) and one that is cyclically challenged at the moment (Bonnell) but that is a recognized name in the industry with a long history of meaningful profitability. There is little industrial logic for the two parts to remain a public company and management realizes that. We think there are two credible paths: sell the parts and liquidate the company or sell films and remain public-thereby attempting to 'roll-up' aluminum extrusion competitors. Reading the tea leaves we think the management team is leaning towards the former. The question then becomes what are the pieces worth.
SOTP Valuation
Far from precise, we think the following is ballpark right. Important to note, we are assuming that the Brazil transaction closes (perhaps too large a leap of faith) and they receive the 85mm of net proceeds as anticipated. If so, we believe net debt will be about 55mm: current net debt number minus 85mm plus 30mm borrowed to close out the pension plan (actual cash payment was 27.7mm) and net of another 10mm of working capital release.
Bonnell might be worth 6.5-7.5x a 55mm mid-cycle ebitda number
| |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
2016 |
| Net Sales |
|
|
|
|
|
|
|
| Aluminum Extrusions |
637,872 |
539,325 |
455,711 |
529,602 |
573,126 |
466,833 |
360,098 |
| EBIT |
|
|
|
|
|
|
|
| Aluminum Extrusions |
49,386 |
39,676 |
37,734 |
48,964 |
48,613 |
43,454 |
37,794 |
| |
|
|
|
|
|
|
|
| AFTER TAX EBIT (25.8% rate) |
|
|
|
|
|
|
| Aluminum Extrusions |
36,644 |
29,440 |
27,999 |
36,331 |
36,071 |
32,243 |
28,043 |
| D&A |
|
|
|
|
|
|
|
| Aluminum Extrusions |
17,414 |
16,272 |
17,403 |
16,719 |
16,866 |
15,070 |
9,173 |
| EBITDA |
|
|
|
|
|
|
|
| Aluminum Extrusions |
66,800 |
55,948 |
55,137 |
65,683 |
65,479 |
58,524 |
46,967 |
| |
10.5% |
10.4% |
12.1% |
12.4% |
11.4% |
12.5% |
13.0% |
For PE FIlms we think it might be worth 4x 17mm for 68mm (the company had a permanent step-down in profitability following the loss of customers due to product migration)
| |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
2016 |
| Net Sales |
|
|
|
|
|
|
|
| PE Films |
97,571 |
118,920 |
139,288 |
133,807 |
127,708 |
128,406 |
109,674 |
| EBIT |
|
|
|
|
|
|
|
| PE Films |
5,669 |
21,431 |
38,345 |
35,273 |
26,203 |
30,912 |
15,817 |
| AFTER TAX EBIT (25.8% rate) |
|
|
|
|
|
|
|
| PE Films |
4,206 |
15,902 |
28,452 |
26,173 |
19,443 |
22,937 |
11,736 |
| D&A |
|
|
|
|
|
|
|
| PE Films |
6,280 |
6,263 |
6,762 |
5,860 |
6,201 |
6,117 |
5,718 |
| EBITDA |
|
|
|
|
|
|
|
| PE Films |
11,949 |
27,694 |
45,107 |
41,133 |
32,404 |
37,029 |
21,535 |
| |
12.2% |
23.3% |
32.4% |
30.7% |
25.4% |
28.8% |
19.6% |
| CAPEX |
|
|
|
|
|
|
|
| PE Films |
3,289 |
2,997 |
6,024 |
8,567 |
2,523 |
4,648 |
9,411 |
Bonnell: 357-412mm
PE Films: 58-78mmto account for uncertainty
Net Debt: 55mm
S/o: 34.4mm
Per share value: $10.46-$12.64 before tax leakage
Conclusion
We are the antithesis of event oriented investors-preferring instead to invest for many years to take advantage of the compounding of the businesses and, hopefully, of our knowledge. Tredegar is an outlier for us but, we think, the discount to its NAV is compelling and looking out a year or two is unlikely to still be public in its current form.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- sale of the remaining two businesses to strategics