RYAM - Rayonier Advanced Materials: Uncovering Value In The Niche Of High Purity Cellulose

2023-07-25 04:05:32 ET

Summary

• Rayonier Advanced Materials operates in the high-purity cellulose industry, with a wide product application across numerous sectors and proprietary processes, presenting a promising investment opportunity.
• Despite challenges in net profitability, the company's potential for being undervalued, its strategic specialization, and robust technical expertise suggest a promising future.
• Investors should consider both the potential rewards and risks, including the company's specialization in high purity cellulose and reliance on proprietary processes, and monitor company-specific and broader market trends.

Thesis

Rayonier Advanced Materials (RYAM), with its unique market position in the high-purity cellulose industry, presents an intriguing investment opportunity. Its wide product application across numerous sectors, combined with its proprietary processes, makes it a compelling choice for investors seeking value. Despite some challenges in net profitability, the potential for the company to be undervalued suggests a promising future. With careful monitoring of company-specific and broader market trends, investing in Rayonier Advanced Materials could offer significant rewards.

What does Rayonier Advanced Materials do?

This company operates in the cellulose industry, creating a variety of products that have numerous applications in various sectors.

In their "High Purity Cellulose" segment, the company specializes in producing cellulose specialties which are natural polymers. These are used in the manufacturing of many consumer-oriented products like liquid crystal displays, impact-resistant plastics, food thickeners, pharmaceuticals, cosmetics, and more. This operation demands a high degree of precision, ensuring industry-leading purity and product functionality. It is an outcome of their proprietary processes and a vast history of technical expertise in cellulosic chemistry.

They also manufacture commodity products which have a significant absorbent capacity. These are used in everyday items like baby diapers, hygiene products, and non-woven fabrics. Additionally, they produce commodity viscose pulp, which serves as a raw material for creating viscose staple fibers used in textiles and clothing.

Market

The future of the market this company operates in appears promising, driven by several key factors.

Firstly, the demand for high-purity cellulose and cellulose specialties is likely to remain robust. This is due to their widespread use in numerous consumer and industrial products, including LCD screens, impact-resistant plastics, food thickeners, cosmetics, and more. As technological advancements drive product innovation, the demand for these versatile and high-quality cellulose specialties is expected to grow further.

Secondly, the commodity products market, particularly absorbent materials and viscose pulp, also has strong growth prospects. With a rising global population and increasing disposable incomes, particularly in developing countries, the demand for consumer goods such as baby diapers, feminine hygiene products, and non-woven fabrics is projected to rise. This will, in turn, increase the demand for the company's commodity products.

The company's focus on biofuels and biomaterials aligns it with broader environmental and sustainability trends that are reshaping many industries. As nations worldwide push for cleaner energy sources to mitigate the impacts of climate change, the market for biofuels is expected to see significant growth. The company's planned production of second-generation bioethanol, which utilizes residual sugars from its existing pulp process, positions it well to capitalize on this trend.

Moreover, the increasing emphasis on sustainability and renewable resources is fueling the demand for biomaterials. With the company's ability to extract other chemical compounds from sustainably harvested trees, they are well-positioned to meet the growing demand for renewable materials and sustainable products.

In addition, the growing environmental concerns over traditional forms of energy are likely to lead to more interest in bio-generated electricity. This will provide another avenue for growth for the company, given its capacity to produce bioelectricity utilizing renewable biomass.

Furthermore, the company's dedication to exploring and maximizing the potential of all parts of sustainably harvested trees aligns with the principles of the circular economy. This approach, aimed at minimizing waste and making the most of resources, is gaining global traction and can provide the company with opportunities to innovate and develop new products or applications.

The company's geographical diversity and ability to produce both hardwood and softwood fibers also provide it with a strategic advantage. It allows the company to cater to the diverse needs of global customers and navigate any regional fluctuations in wood availability or price.

Overall, the future of the company's market looks promising, with a host of opportunities arising from both technological advancements and shifts towards greater sustainability and renewable resources.

Competition

In the industry of cellulose specialties, Rayonier Advanced Materials finds itself in a competitive environment where performance, adaptability of the product to specific needs, and technical assistance stand at the forefront, alongside pricing. Key players they compete with in this space include GP Cellulose, Borregaard, Bracell, Sappi, Nippon, Cosmo Specialty Fibers, AustroCel, and the Aditya Birla Group. Rayonier Advanced Materials' edge lies in their diversified production capabilities that enable them to cater to a broader spectrum of the cellulose specialties market.

For their commodity products, the competition hinges primarily on price. The quality parameters such as uniformity and purity, while important, often take a backseat. This market sees Rayonier Advanced Materials go up against businesses such as Sappi, AustroCel, Bracell, GP Cellulose, Domtar, International Paper (NYSE: IP ), Klabin, and Suzano.

When it comes to the biomaterials sector, the competition is relatively limited. This field requires a hefty capital investment, expertise, and a reliable source of sustainable feedstock, and therefore has fewer active competitors. Key players in this area, especially in the lignosulfonates market, include Borregaard and Domsjö Aditya Birla.

In the paperboard segment, where Rayonier Advanced Materials operates its plant in Quebec, the competition includes companies like WestRock (NYSE: WRK ), Graphic Packaging, Metsa Group, Stora Enso (SEOAY), Clearwater Paper, and Sappi.

Lastly, in the High-Yield Pulp sector, price is the most significant differentiator. Occasionally, superior quality or higher bulk may command a better price. Here, the company's plant in Temiscaming competes with businesses such as Millar Western, West Fraser, Paper Excellence, Estonia Cell, Sappi, and Winstone Pulp.

Performance

Source: Seeking Alpha (Retrieved on 07-22-2023)

According to the most recent earnings call, it seems that the company has been performing well due to some forward-thinking strategies and a keen understanding of market dynamics.

One of the crucial strategies the company implemented was 'destocking', a technique where the company intentionally reduced its inventory. This move caused a dip in sales during the first quarter, but it was a calculated step that the company's management had anticipated and planned for.

However, the impact of destocking isn't permanent. The company expects this phase to lighten up as they progress into the second quarter. This implies that the company has a strong inventory management strategy, which carefully balances the short-term impact with long-term benefits.

What's more exciting is that the company is forecasting growth to resume to its typical levels in the second half of the year. This suggests that the company is confident in its operations and market position. Being able to predict growth following a deliberate period of destocking demonstrates a solid understanding of market trends.

Moreover, the company anticipates a slight uptick in sales in the second quarter compared to the first one. This shows that the company has a recovery plan in place and is prepared to bounce back from the effects of the destocking phase. The ability to predict a potential recovery in the near future is a clear testament to their business savvy and industry knowledge.

So, in a nutshell, the company's robust performance can be traced back to its strategic approach to inventory management, its deep understanding of the market, and its capacity to plan for future trends.

Future performance

The company's potential for future success is built on a foundation of strategic specialization and robust technical expertise. Operating in a niche within the cellulose industry, it has honed its focus on the production of high purity cellulose specialties. This is no ordinary feat, as it requires a specific technical knowledge base and capabilities. Their ability to navigate this niche gives them a distinctive edge, setting them apart from other players in the cellulose industry.

Their products find applications in a wide spectrum of sectors, from electronics and plastics to food, pharmaceuticals, and cosmetics. This is a significant strength, as the diversity of applications provides a level of protection against downturns in any single sector. Moreover, the growth trajectory of some of these sectors, such as electronics and pharmaceuticals, could drive increased demand for the company's products in the future.

The company's proprietary processes and technical expertise in cellulosic chemistry are also noteworthy. They have perfected the art of ensuring high purity and functionality in their products, a testament to their commitment to quality. This focus on quality could help the company foster strong relationships with its customers, making it a trusted supplier in their eyes. The value of such customer relationships cannot be overstated, as they can lead to repeat business and a stable customer base.

Strategic foresight is evident in the company's planning. The destocking plan discussed in the earnings call is a clear example of the company making tactical decisions to optimize its operations. The ability to make such strategic moves is crucial for a company's long-term success.

Overall, I expect growth that isn't spectacular, but steady growth.

Risk analysis

While the company's specialisation in high purity cellulose is a strength, it could also present a risk. Being highly specialised can sometimes make a company vulnerable to changes in market demand or technology. If for any reason the demand for high purity cellulose declines or a new technology disrupts the market, the company could face challenges.

The company's reliance on proprietary processes for maintaining the high quality of its products also presents a potential risk. Any disruption or inefficiencies in these processes could impact their production and performance. Moreover, protecting proprietary processes and technologies can be challenging and could potentially expose the company to legal risks.

While the company's products are used across various industries, providing a diversified revenue stream, any downturn in these industries could affect the demand for their products. Particularly, sectors like electronics and pharmaceuticals are subject to rapid technological changes and intense competition, which could influence the demand for the company's products.

From a macro perspective, the cellulose industry is likely subject to environmental regulations. Any changes in these regulations or increased emphasis on sustainability could pose challenges for the company.

Overall, while the company has several strengths and positive indicators for future growth, these potential risks should be carefully considered when evaluating the company's prospects.

Valuation and Performance Comparison

Source: Seeking Alpha (Retrieved on 07-22-2023)

It is noteworthy that the company's Price/Sales ratio is 0.17, which is significantly lower than the other three peers. This could suggest that the market currently undervalues the company relative to its sales. However, the company's net profit margin [TTM] is only 0,08%, which is lower than both International Paper and Stora Enso Oyj. This could indicate that the company has lower operational efficiency or higher costs relative to these competitors. Sales growth is higher than its peers. A P/E is not shown as it’s calculated with the data from the year 2022, in which its earnings were negative. The competitors have really attractive P/E ratios.

Conclusion

Based on the financial metrics and company information analyzed, Rayonier Advanced Materials presents an interesting investment opportunity. The company operates in the niche market of high-purity cellulose, demonstrating a high degree of precision and industry-leading product quality. These attributes, coupled with the wide range of applications for its products, make Rayonier a unique player in the cellulose industry.

From a financial perspective, Rayonier's lower Price/Sales ratio compared to its competitors could suggest that the company's stock is undervalued relative to its sales. This could present an attractive entry point for investors seeking value. However, it's important to consider that the company's net profit margin is lower than some of its competitors, indicating potential challenges in profitability or higher operational costs.

As with any investment decision, it is crucial to consider both the potential rewards and risks. While Rayonier Advanced Materials shows promising signs of being undervalued, potential investors should keep in mind the company-specific and macroeconomic risks discussed earlier. A comprehensive investment strategy should involve ongoing monitoring of both company-specific factors and broader market trends to ensure the investment aligns with your financial goals and risk tolerance.

In conclusion, given Rayonier Advanced Materials' niche market position, wide product application, and potentially undervalued status, the company presents a compelling investment opportunity.

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