2023-05-31 04:46:06 ET
Summary
- We analyzed three main investors' concerns, providing a few positive notes to price in.
- Lower gas price evolution and higher merchant pass-through costs will provide benefits to APD's net income.
- CAPEX guidance unchanged and higher EPS estimates. We reaffirm our buy rating.
After having commented on Air Liquide , today we are analyzing Air Products and Chemicals ( APD ). Since our last release called ' Time To Buy ' in early March, APD stock's price performance was down by 5%. In the mind time, the company reported its second-quarter figures, surprising Wall Street estimates. Today, we are providing our latest company update and a few negative perspectives on equity analyst future expectations.
There are three ongoing debates: 1) project backlog and execution, 2) APD's succession plan, and 3) business performance relative to peers.
Starting with the first point, the company's growth strategy has always been to invest in the clean energy transition. APD is at the forefront of large-scale mega-projects and is always the first mover. This is also the case with the hydrogen revolution. Aside from the APS ongoing projects (Fig 1), last time we deep-dive into the new company energy project, adding 1) the Alberta facility for sustainable aviation fuel and blue hydrogen production, 2) the $4 billion project on the green hydrogen facility in Texas and 3) Jazan Phase 2 new development. After having listened to the Q2 conference call, we decided to leave unchanged our CAPEX estimates for the current year (Fig 3) and also for the company's order backlog ($11 billion-plus in investments in mega-sustainable projects - Fig 2).
Mare Evidence Lab's previous analysis
Fig 1
Going the investor concern, the company usually aligned its shareholder interest with government support and financial incentives. This was also recorded in the new Alberta project, with the Canadian government that will support the energy complex for approximately $475 million in funding . APD has historically achieved a core operating profit return higher than 10% on a $1 capital invested. With the current backlog higher than $11bn, here at the Lab, we assume an EPS growth of more than $4 per share over the next 4 years.
In Q2, the company decided to exit a $2 billion coal-to-methanol project in Indonesia. Air Products and Chemicals will redirect the CAPEX investment to more lucrative projects. Looking at the press release , the company's financial " landscape for green and blue hydrogen projects has significantly changed in the last year, driving increasing opportunities for APD to invest in these energy transition projects around the world ". No sooner said than done, last week, the company announced a $1 billion acquisition for a multi-billion gas-to-liquid state-of-an-art facility in Uzbekistan. Not much information was disclosed; however, we believe that this Central Asia deal is more aligned with APD’s on-site business model. With CAPEX guidance unchanged, here at the Lab, we believe that Indonesia's exit and Uzbekistan's new acquisition is a zero-sum game.
Fig 2
Fig 3
Going to the second concern, APD's CEO Seifi Ghasemi is one of the most appreciated CEOs in the chemicals sector. This is not a surprise given its track record. In detail, since being named APD’s CEO in mid-June 2014, the company stock price grew more than 200% compared to the S&P Chemicals index which achieved a plus 60% . Despite that, Mr. Ghasemi is 78 years old and is the oldest CEO we follow. Two weeks ago, the CEO’s contract was renewed through 2028 and despite its vigor, he is approaching 80, and a few investors (long-only) started to raise questions about the APD succession plan. There is no news to report, but Edward Monser, APD lead director, explained that the company's board is “ maintaining our strong focus on his succession ”. Here at the Lab, we believe that many investors lack comfort there; however, we do believe that someone internally will be ready to lead APD's bright future.
Mare Ev. Lab analysis
Going to the last compelling point, we believe that industrial specialty gas companies will continue to fare well in a challenging economic environment. In March, APD’s volumes were higher by 6% and its average selling price was up by 8%. On a comparable basis, Linde volumes were flat and the average selling price was up at the same 8% rate. APD increased its adj EBITDA by 13% compared to Linde which achieved a plus 11%.
Our upside
As already mentioned in the Air Liquide analysis, here at the Lab, we are forecasting lower natural gas costs. This might provide relief on APD's margin. APD's Q2 EU region sales reached $753 million and the EU area is the third market for the American specialty gas company. Related to the EU gas price evolution, our analysis is supported by 5 reasons: 1) some gas demand could be permanently lost , 2) gas storages are full , 3) better weather conditions, 4) LNG abundance, and 5) Germany contracting GDP . APD adj. EBITDA margin is still behind Asia and the Americas. However, in the last quarter, thanks to the strong price–energy cost pass-through, the company's bottom line might significantly benefit from nat gas evolution. This is already evident from the graph below.
Conclusion and Valuation
APD managed to beat Wall Street analyst expectations and this should support a re-price. Two of the three main concerns are minor, while CEO replacement might be an ongoing issue. However, the company currently employed over 22,000 people. All in all, adjusted EBITDA increased 13% on a yearly comparison with also a plus 6% in volume growth. 2023 estimated CAPEX was also unchanged at a mid-point of $5.25 billion. Given the higher sales on energy cost pass-through, we should modestly increase our internal estimates. For this reason, we are slightly revising upward our EPS target from $12.65 to $12.83, and maintaining our NTM P/E multiple of ~25x, we derive a target price of $320 per share. Downside risks include project delays and project execution with higher costs. Timing of new hydrogen applications and softness in global industrial activity.
For further details see:
Air Products and Chemicals: Growth Has A Price