MATV - Mativ Holdings Q3: Weak Financials And High Valuation

2023-11-21 23:11:27 ET

Summary

• Mativ Holdings posted disappointing Q3 FY23 results with a decline in net sales and underperforming segments.
• The company's high debt and negative growth expectations make it a risky investment.
• MATV's valuation is high considering its financials, and its stock price is bearish, indicating a potential further decline. A hold rating is recommended.

Mativ Holdings ( MATV ) is a performance materials company. MATV recently posted Q3 FY23 results, which I will analyze in this report. MATV seems to be a risky investment at this time. It has a huge debt, and the growth expectations aren't positive. In addition, its valuation seems high considering its financials. Hence, I assign a hold rating on MATV.

Financial Analysis

MATV recently posted its Q3 FY23 results . The net sales for Q3 FY23 were $498.2 million, a decline of 9.6% compared to Q3 FY22. Its Advanced Technical Materials and Fiber-Based Solutions segments underperformed, which led to a sales decline. The sales from the ATM segment declined 7.6% in Q3 FY23 compared to Q3 FY22, and the reason for the decline was low demand and seasonal slowing, especially in Europe, due to which volumes were down comparatively. The sales from the FBS segment were down 16.7% in Q3 FY23 compared to Q3 FY22. The FBS segment sales were affected by inventory destocking issues. Its EBITDA margin in Q3 FY23 was up 30 basis points compared to Q3 FY22. Higher pricing and a favorable product mix were the major reasons behind it.

During Q3 FY23, there was a $401 million goodwill impairment charge and $24 million related to the divestiture of its Engineered Papers and asset write-downs, so if we exclude these charges, the net loss for Q3 FY23 was $30 million compared to a net loss of $22.5 million. Higher manufacturing costs and lower volumes affected its profitability. The company's not being profitable is a big concern because its debt has been increasing, which can be a concern. Its long-term debt as of September 2023 stands at $1.7 billion, a rise of 2.9% compared to December 2022. It had to face higher interest expenses in Q3 FY23, and if the debt isn't reduced, its profitability will continue to be affected. So, the decline in sales was concerning, and the company may have difficulties in the near future as the destocking issue is still present and is anticipated to have an impact on sales in the upcoming quarter.

Technical Analysis

MATV is trading at $13.8. It is a falling knife, and I won't advise trying to catch it. The stock has fallen more than 70% since 2021, and it looks like it might continue to fall. The stock tried to form a base at the $14 level. The stock traded at the same level for four months, but the price gave a fresh breakdown, and after the breakdown, the stock retested the level. So there is a high chance it might continue to fall. The next support zone for the stock is around $10.5, and looking at the bearishness of the stock, it might reach the $10.5 level in the near term, which is around 20% below its current trading price. So, looking at the price action, I believe one should avoid it.

Should One Invest In MATV?

Their results were disappointing, and the huge debt is a concern. Now, if we look at its valuation, we can see that it is trading at a higher valuation, which it should not base on financials. MATV has a PEG [FWD] ratio of 1.53x compared to the sector ratio of 1.49x and has an EV / EBIT [FWD] ratio of 15.53x compared to the sector ratio of 12.53x. The outlook for the next quarter isn't positive as the destocking issue is expected to hamper its sales, and the economic environment isn't looking favorable. So, I think its valuation is quite high based on current performance and future expectations. In addition, the huge debt is also a concern. Having a huge debt is not always bad when there is a huge scope for growth, but in this case, growth expectations aren't significant. To give you the context, the market capitalization of MATV is around $750 million, and the debt is around $1.7 billion. So, in my opinion, it would be best to stay from MATV as it seems to be a risky counter at this time.

Risk

The cost of the raw materials they need to create their products is a major factor. The cost of some of the resins used by their ATM segment and wood pulp, which makes up the majority of the raw materials used in their FBS section, is extremely cyclical and can fluctuate more than fluctuations in general consumer or producer inflation in the economy as a whole. Additionally, throughout that same era, various circumstances, such as shifts in the world's oil markets, have caused the price of polypropylene to fluctuate significantly. Their financial performance can be greatly impacted by unanticipated increases in raw material costs or by the unavailability of such raw materials (due to force majeure or other reasons), as they frequently enter into agreements with customers under which they commit to supply products at fixed prices. They often are unable to promptly pass on increases in the cost of raw materials to their customers, and in many cases, they are unable to pass on the full increase even in cases where they do not have fixed-price agreements.

Bottom Line

Their quarterly results were disappointing, and the destocking issue is expected to hamper their sales in the next quarter. So, the growth expectations aren't significant, which becomes a concern because it has a huge debt. In addition, its price action is bearish, indicating that the stock price might fall further. So, considering its high valuation and poor results, I assign a hold rating on MATV.

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