TCN - Rhizome Partners - Univar Solutions: A Buy At A Bargain Basement Price

• Univar recently sold off about 25% and is now trading at 9-10 times its 2022 price-to-free-cash-flow (P/FCF) multiple.
• Univar has dense routes in North America, its key market, a unique advantage tends to compound over time.
• We believe 15 times P/FCF is reasonable for a high-quality company like Univar with 5% growth rate.
• We are monitoring the stock price of UNVR and will likely add to our holdings at the right time.

The following segment was excerpted from this fund letter .

Univar Solutions ( UNVR )

Univar recently sold off about 25% and is now trading at 9-10 times its 2022 price-to-free-cash-flow (P/FCF) multiple with a little over 2 times net debt/EBITDA. Univar, Brenntag ( OTCPK:BNTGF ), Tricon ( TCN ), IMCD ( OTCPK:IMCDY ), Helm, and Azelis ( OTCPK:AZLGF ) are the largest chemical distributors in a fragmented industry. Like many distribution businesses, route density is critically important. A truck that can make multiple stops on a route will have structural advantages over its smaller competitors. Univar has dense routes in North America, its key market.

This unique advantage tends to compound over time. Traditionally, chemical distribution is a “pick up the phone and call your sale representative” business. Around the world, there are different degrees of digital penetration in the sales process, with Asia at the leading edge of technology adoption. Univar Solutions and Brenntag are the two leaders that have invested heavily in technology and e-commerce solutions for their customers. Smaller mom-and-pop operators lack the financial and human resources to invest in technology solutions.

On the other hand, a purely digital marketplace for purchasing chemicals often struggles to gain critical transaction volume because of the lack of logistics and fulfillment capabilities. Customers can place their orders, but they cannot receive the orders in reasonable time. Dense routes consisting of warehouses and trucks located under 60 minutes driving distance are the “atoms” that prevent “bits” players from attacking the chemical-distribution business.

Over time, we believe that the top players will consolidate the smaller mom-and-pop operators. A recession will likely accelerate the consolidation trends in the industry. At today’s valuation, shareholders can generate a 10-11% internal rate of return ((IRR)), assuming no growth in earnings, no accretion from acquisitions, and no multiple expansion. This is a bear case scenario where the business merely accumulates the free cashflow generated for the next few years.

In a base case, the return is likely 25% IRR over three years after emerging from the recession, assuming a modest 5% growth in free cash flow per year and multiple expansion to 15 times P/FCF. Univar will likely gain market share from undercapitalized competitors and make attractive acquisitions in a recession. In a counterintuitive way, Univar may emerge from a recession with higher free cashflow. We believe 15 times P/FCF is reasonable for a high-quality company like Univar with 5% growth rate. It equates to 6.7% free cashflow yield and can lead to about 12% long turn sustainable return to shareholders due to the 5% growth rate.

We are monitoring the share price of Univar and will likely add to our holdings at the right time. At a certain price, we may also invest in Brenntag, because we believe both companies are structurally superior to smaller competitors and will continue to take market share.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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