Summary
- Huntsman Corporation has seen a real transition over the past decade.
- Originally being a cyclical commodity play with a mixed track record, Huntsman has seen a nice transition via accretive deals.
- Following this transition, low leverage situation and compelling earnings multiple, I see real appeal emerging here with Huntsman Corporation.
It has been a very long period of time since I last looked at shares of Huntsman Corporation ( HUN ) . In fact, it has been all the way back to 2014, when I concluded that the latest disappointment added to a poor long-term track record, as a real transition has taken place ever since, creating a whole other setup today.
A Quick Look Back
Late in 2014, Huntsman Corporation closed 30% of its capacity in the European dioxide pigment business, which left me concluding that forward earnings were not realistic anymore. The latest closing added to a track record which has been filled with occasional disappointments.
Worrisome is that the company only acquired these activities (and some more) in September 2013, when it paid $1.1 billion for these activities, targeting huge costs savings as well. Worrisome is that the dioxides did not just suffer from a cyclical pullback, as demand appeared to be under structural pressure at the time. These activities made up about 10% of Huntsman's sales back in the day, which measured about $11 billion.
Huntsman posted EBITDA of $1.4 billion, with adjusted earnings reported at just over $2 per share. The company guided for EBITDA to improve towards $2 billion in a few years down the road, in which case earnings could rise toward the $4 per share mark.
A recovery in earnings was badly needed, with net debt reported at $3.4 billion, which made leverage on the high side, but certainly manageable. The resulting 2.5 times leverage ratio should come down a lot if the company could achieve $2 billion in EBITDA, but I really doubted that. With a quarter of a billion shares trading at $23 per share, equity was valued at $5.7 billion, and the entire business at $9 billion, equal to about 11 times adjusted earnings.
That said, I feared a consistent and large gap between both reported and adjusted earnings. Moreover, sales have only grown from $9.5 billion to $11 billion in a decade long period, as growth was simply not inspiring, which meant that no value was created for investors over this period of time.
Rangebound
Since urging a cautious tone on HUN stock at $23 in 2014, shares of the company have traded in a wide range. Shares fell to the single-digit territory in 2016, rallied to the $30s in 2017, fell back amidst the pandemic before breaking out again, peaked at $40 in 2022, and now trade at $31. The resulting 35% returns over a near-decade long period are somewhat disappointing, given that the market at large has done well, although Huntsman pays out a reasonable dividend yield, now approaching 3%.
In the meantime, the company made an attempt to create a simpler and higher-value added portfolio, focusing heavily on polyurethanes, advanced materials, performance products and textiles. Forwarding to the third quarter of 2022, the company posted sales of $8.5 billion on a trailing basis, actually having shrunken the business since 2014. This comes as the company announced $3.7 billion worth of divestments over the past year (since 2020), in part offset by roughly $1.4 billion in acquisitions being pursued during a similar period of time.
Consolidated EBITDA has been flattish at $1.4 billion, as the move to focus on higher-value added products made that adjusted EBITDA margins have improved to 16% of sales.
Polyurethanes is a $5.4 billion business posting double digit EBITDA margins in a market in which the company competes against the likes of Dow (DOW), Kingspan (KGSPF), BASF (BASFY) and Lanxess (LNXSF), among others. Products to think of include insulation, adhesives, automotive, construction materials and industrial markets.
This is complemented by two smaller segments. The $1.8 billion performance products business is very profitable with margins posted in the high-twenties, with sales derived from coatings, adhesives and additives. Advanced materials generate $1.3 billion in sales, although that this is a very profitable segment as well, with EBITDA margins approaching 20% of sales.
If we look at the third quarter results , we see that Huntsman has cut net debt to about $1 billion. So not only has the business been growing margins and become a lot more predictable, leverage has come down a lot as well. To compensate investors for smaller sales and flattish EBITDA over the past decade, the company has shrunken the share count to 199 million shares, eliminating about one in every five shares outstanding since 2014.
The company already announced the sales of its Textile business in August 2022 in a $718 million deal, with Archroma ending up to be the buyer of the assets. Following this deal, the company would operate just three segments. The divested business generated $772 million in sales and $94 million in EBITDA, as net cash proceeds from the deal are likely coming in fifty million lower following anticipated taxes in relation to the deal.
Net proceeds for the deal came in at $540 million, as the deal closed in February, as the original deal tag included underfunded pension liabilities as well. Deal terms indicate a valuation at just under 1 times sales and 7.6 times EBITDA, multiples which are actually accretive to the valuation of Huntsman itself.
And Now?
Reality is that I am quite impressed with the performance of Huntsman Corporation, which has been on a multi-year effort which involved many deals, both on the buy and sell front. The company has posted adjusted earnings at $3.03 per share in the first three quarters of the year, as the resulting $4 per share run rate looks compelling in relation to the current share price, at just 8 times earnings with leverage being very modest. That said, the textile sale will likely involve some earnings dilution as well, although shares will still comfortably surpass the $3 per share mark.
The reality is that a successful transformation seems to have been achieved. Moreover, leverage is almost non-existing, as earnings multiple have fallen a lot, with the business having become a lot less cyclical than was the case in the past. Given all of this, I actually believe that Huntsman Corporation valuations look very compelling here, certainly as shares are down a quarter from last year´s highs.
Hence, Huntsman Corporation looks like a very interesting business here, as undoubtedly the strengthened balance sheet will be used for further transformative and bolt-on deals in the year to come. Given all this, shares look almost too cheap to ignore, as Huntsman has deserved a prominent position on my watch list after what appears to be a successful transition, with appeal looking imminent.
For further details see:
Huntsman Corporation: On A Hunt