2023-03-08 23:26:23 ET
Summary
- Air Products and Chemicals announced an exclusive agreement to operate the US's largest green hydrogen facility in Texas and APD will deploy approximately $4 billion.
- APD is yielding 2.38% and this marks the 41st consecutive year of a DPS hike.
- APD's CAPEX is now expected to be ~$11 billion plus with investments in mega-sustainable projects.
- APD is combining growth and value and this confirms our buy.
After having participated at the Bank of America’s 2023 Global Agriculture & Materials Conference, today we are back to comment on Air Products and Chemicals ( APD ). Here at the Lab, we do have a good grip on specialty gas companies and APD was our first investment within the sector. Indeed, our initiation of coverage was titled: Great Mix Between Value And Growth and we hope you get on board with us. Since May 2022, the company is up by more than 26% including its quarterly coupon payment, and today we will update our readers on the latest company's development.
Mare Evidence Lab's previous publication
Starting with our value approach based on dividend growth, it is important to highlight that the company announced a quarterly dividend increase of 8% to $1.75 from $1.62. Currently, APD stock is yielding 2.38% and this mark the 41st consecutive year of a DPS hike. This increase was expected and demonstrated the company's commitment to remunerating its shareholder's basis while investing for growth. As already mentioned, APD is uniquely positioned to achieve growth in the industrial gas sector, while executing and developing world-scale hydrogen megaprojects to drive the current energy transition. In 2023, according to our calculation, the company will pay approximately $1.5 billion in dividends (applying a plus 8% from the remaining 3 out of 4 dividend payments expected for 2023, in 2022 the company paid $1.41 billion). These new investments will be carried out without compromising its balance sheet (target A/A2 credit rating). To support the development of its projects, the company recently announces its first green bond at favorable fixed rates, and in detail, APD raised $600 million and €700 million at an interest rate of 4.8% and 4% respectively.
Looking at the growth, last time we deep-dived into the company's main construction projects:
- the largest blue hydrogen project located in Alberta (Canada),
- the largest blue ammonia project located in Louisiana ((USA));
- the largest and the world's most advanced Sustainable Aviation Fuel facility located in California ((USA));
- the largest green hydrogen project called NEOM located in the Saudi Arabia peninsula;
- a new plan to build a new green hydrogen facility located in NY.
As a reminder, the company is now the largest global hydrogen producer, with the largest percentage of sales from hydrogen.
In this period, APD announced a few positive key takeaways:
1) The Canadian federal and provincial governments will support Air Products' multi-billion-dollar hydrogen energy complex in Alberta with $475 million in funding. In 2024, Alberta will be the first major blue hydrogen facility for both sustainable aviation fuel ((SAF)) and for the traditional oil refineries in the area. This initial investment is the first of a series and will be followed by the California SAF project as well as the NEOM (in the Saudi peninsula). Regarding NEOM, we are lowering our APD cash contribution projection from $1.7 billion to $800 million thanks to the higher use of non-recourse project financing.
2) In the Q1 call, the company announced an exclusive agreement to operate the US's largest green hydrogen facility in Texas. APD will deploy approximately $4 billion for 1.4GW/200tpd (compared to the NEOM project at 4GW/650tpd). This new project appears primarily for home consumption with a specialized division to export hydrogen as ammonia.
3) Jazan Phase 2 will begin to contribute starting from March this year, and the company has two large gasifier facilities coming online over approximately next year in Jiutai and Debang (plus the Indonesian one in 2025).
Also, the Louisiana blue ammonia project should ramp up in 2026. Even if it is smaller, the company has a smaller green hydrogen project in the Niagara area (thanks to hydroelectric power generation) that is scheduled for the 2026-2027 period.
Here at the Lab, updating APD's CAPEX, we now arrived at an $11 billion-plus in investments in mega-sustainable projects. In order, we are including:
- Alberta blue hydrogen for a total investment of $1.3 billion (2024),
- The California SAF's facility for a CAPEX consideration of $2.5 billion (2025),
- The Louisiana blue hydrogen facility for $4.5 billion (2026),
- The NEOM green hydrogen with investment reduced from $1.8 billion to $800 million (2026), and the new Texas green hydrogen project with $4 billion investments (2027).
Additional projects also included activity in Niagara Falls, the Netherlands, and the UK. Aside from the growth CAPEX which is estimated at $4.3 billion for 2023, we are also including a maintenance CAPEX of $700 million (in line with APD's sales ratio).
Conclusion, Valuation & Risks
All in all, looking at the recent quarter, adjusted EBITDA increased by 8% on a yearly comparison with also a plus 2% in volume growth. In detail, the price-to-variable cost spread significantly contributed to most of the EBITDA gain and this was partially offset by higher fixed costs and unfavorable currency development. Regarding the GEO area, America's EBITDA grew by 13% thanks to refinery hydrogen demand recovery and robust merchant gas, Jazan was in in-line and contributed $64 million in equity income. European EBITDA finally grew by 28% reflecting higher gas pricing which was up by 24% yearly and in line with previous company estimates. Therefore, we are making minor changes in our valuation, we are slightly increasing our EPS target from $12.35 to $12.65 in 2024, and using our NTM P/E multiple of ~25x , we derive a target price of $316 per share. Mare Evidence Lab's outperforming rating reflects APD's defensiveness of industrial gases and an above-market growth forecast from its $11 billion-plus investments in sustainable projects.
The world needs more energy and in particular more green energy. The company is very well positioned to benefit from secular long-term upside; however, we should also note Mare Evidence Lab's downside risks which include:
- a slowdown in global industrial activities (in APD's specialty gas division),
- a delay in projects execution (especially in Emerging Markets), and,
- timing in hydrogen applications.
Sector previous publications:
- APD: Solid Q4 Results
- Linde: Positive News Ahead
- Air Liquide: Our Positive View Is Confirmed
For further details see:
Air Products and Chemicals: Time To Buy