Summary
- Among the applications of Ingevity's solutions and products, we find products for automobiles as well as the products for the extraction and production of petroleum, agrochemicals, adhesives, and lubricants.
- New patents will likely bring new products, a larger target market, and revenue growth.
- Certain investors will likely appreciate that Ingevity intends to grow inorganically.
- Under my cash flow statement projections, I assumed the addition of new products for applications in all-electric and hydrogen fuel cell vehicles.
Ingevity Corporation ( NGVT ) recently reported beneficial guidance for 2023, including 2023 FCF of $160 billion and incoming revenue catalysts from increased automotive production and supply chain normalization. Even considering risks from a decline in government spending or risks related to the total amount of debt, I believe that the stock is undervalued. Future free cash flow would likely imply a fair price of close to $107 per share.
Ingevity
With products aimed at reducing emissions, Ingevity is a company currently incorporated in the United States with both national and international operations. Among the applications of Ingevity's solutions and products, we find products for automobiles as well as the products for the extraction and production of petroleum, agrochemicals, adhesives, lubricants, publishing inks, and bioplastics among others.
Source: 10-k
The performance materials segment provides materials to 80 customers, mainly in the automotive industry, through its production plants, five distributed between China and the United States. Some of these clients are BorgWarner Inc. ( BWA ), Kayser Automotive, and Korea Fuel-Tech Corporation among others. The top ten customers in this segment account for almost 89% of revenue, so I believe that there exists some level of client concentration risk. Most revenue comes from North America, but the company is also present in Asia, the EMEA regions, and South America. I believe that the company is geographically diversified.
Source: 10-k
The chemical products segment has solutions for engineering, applications in asphalt, and applications for industries. Its largest clients include Colas SA, Ergon Inc, Associated Asphalt Inc, and Idaho Asphalt Supply. Regarding asphalt applications, 700 clients are distributed in 75 different countries, and sales are carried out via Ingevity's own sales channels, mainly in Asia and the United States, as well as distributors in other parts of the world. This business segment reports more revenue concentration in North America than the previous business segment. With that, the company sells everywhere in the world. I don’t believe that shareholders should worry here.
Source: 10-k
Beneficial Outlook Includes 2023 Sales Of $1.9-2.1 Billion and 2023 FCF Of $160 Billion Thanks To Increased Automotive Production And Supply Chain Normalization
In my view, Ingevity delivered beneficial guidance including 2023 revenue of $1.9-$2.1 billion and FCF of $160 million. It is worth noting that management expects opportunities from increased automotive production, stabilization of the market in China, and normalization of the previous supply chain issues. Among the slides received in the last quarterly presentation, I believe that investors should see the following slide .
Source: Investor Presentation
Competition With Large Players
Competing companies are not usually present in more than one market, unlike Ingevity, which positions its products in different areas. In summary, we can name Cabot Corp ( CBT ) and Kuraray ( KURRF ) as well as local American and Chinese producers in the segment of materials for the automotive industry, Nouryion Chemicals, Arkema S.A. ( ARKAF ), and Kao ( KAOCF ) in the asphalt applications section, Kraton Corp, Eastman Chemical ( EMN ), Borregaard ( BRRDF ), Repsol ( REPYY ), Firmenich, and Lamberti in the competition in the materials for industry section, and Daicel ( DACHF ) and BASF ( BASFY ) in the synthesis and sale of caprolactone along with the application of polymer for pharmaceutical and medicinal products.
Market Estimates Include Growing FCF Margin From 2022 To 2024
Market estimates include 2024 net sales of $1.897 million, a net sales growth of 3.38%, EBITDA close to $528 million, operating profit of $402 million, and an operating margin of 21.20%. 2024 net income would also stand at $325 million with a net margin of 17%. 2024 Free cash flow would be close to $263 million with an FCF margin of 13.90%.
Source: S&P
Balance Sheet: Asset Growth Thanks To Acquisitions
As of December 31, 2022, Ingevity reported cash of $76 million with accounts receivable close to $224 million, inventories of $335 million, and prepaid and other current assets of $42 million. In sum, current assets stand at $679 million, more than 2x the current amount of liabilities.
Property stood at $798 million together with operating lease assets of $56 million, goodwill of $518 million, and other intangibles of $404 million. In 2022, the total amount of goodwill and intangibles increased substantially because of organic growth. Certain investors will likely appreciate that Ingevity intends to grow inorganically. In 2022, the company reported the acquisition of Ozark Materials, LLC.
On October 3, 2022, we completed our acquisition of Ozark Materials, LLC , and Ozark Logistics, LLC, pursuant to that certain Equity Purchase Agreement, by and among Ingevity, Ozark Materials and Ozark Holdings, Inc. In accordance with the Purchase Agreement, we acquired from Seller, all of the issued and outstanding limited liability company membership interests of Ozark Materials for a purchase price of $325.0 million, subject to customary adjustments for working capital, indebtedness and transaction expenses. Source: 10-k
Source: 10-k - Ozark Materials, LLC.
The list of assets includes deferred income taxes worth $5.7 million accompanied by strategic investments worth $109 million. In sum, total assets were equal to $2.7 billion, more than 1x the total amount of liabilities.
Source: 10-k
The list of liabilities reported included accounts payable of $174 million, accrued expenses of $54 million, and accrued payroll and employee benefits of $53 million. Current operating lease liabilities were $16 million with notes payable of $0.9 million and income taxes payable of $3.6 million. Current liabilities were equal to $290.3 million.
The long-term debt including finance lease obligations was around $1.47 billion together with a non-current operating lease liabilities of $40 million, deferred income taxes of $106.6 million, and other liabilities of $114 million. In sum, total liabilities stand at $2.03 billion.
Source: 10-k
Assumptions Behind My Cash Flow Model
In the last annual report, I found certain hints regarding its expansion and the strengthening of its productive capacity. These are acquisitions, which would be added to the current properties in Georgia and Louisiana, both for the manufacture of chemical materials and the other operating plants in China and the United Kingdom, which are currently part of leases or concessions. In my view, the company seeks to expand its client portfolio because at this time there are only a few clients who concentrate the amount of revenue in each segment.
It is also worth noting that Ingevity intends to grow thanks to patent generation and trade secrets. New patents will likely bring new products, a larger target market, and revenue growth. Management provided a significant amount of commentary in this regard.
Our business strategy includes filing patent and trademark applications where appropriate for proprietary developments, as well as protecting our trade secrets. We actively create, protect, and enforce our intellectual property rights. We are filing for and being granted patents for product and process developments for our Performance Materials business that we believe are both novel and consistent with trends in the technological development of engines. Our Evotherm® Warm Mix Asphalt technology is supported by numerous global patents. Source: 10-k
Finally, under my cash flow statement projections, I assumed the addition of new products for applications in all-electric and hydrogen fuel cell vehicles. Considering the revenue growth expected in the global fuel cell vehicle market, I believe that Ingevity could benefit significantly from these new products.
Our long-term strategy is to grow our sales of products for applications in all-electric and hydrogen fuel cell vehicles to off-set the expected decline in activated carbon sales for ICE.
The global fuel cell vehicle market size was valued at USD 1.14 billion in 2021 and is anticipated to register a CAGR of 49.9% from 2022 to 2030. Source: 10-k
My Cash Flow Statement Projections Imply A Valuation Of $107 Per Share
My cash flow statement projections include 2030 net income of $54 million, D&A of close to $275 million, and 2030 disposal and impairment of assets of $17 million. I also assumed restructuring and other income charges close to $14 million with 2030 shared based compensation of $27 million.
Source: Malak's Expectations
My adjustments for accounts receivables would be close to $45 million with changes in inventories of -$51 million, changes in accounts payable of $17 million, and accrued payroll and employee benefits of -$23 million. In sum, the cash flow from operations would stand at $397 million in 2030. Capital expenditures would stand at close to -$115 million, and 2030 FCF would be $282 million.
Source: Malak's Expectations
With 2030 CFO of $397 million and capital expenditures of -$115 million, 2030 free cash flow would stand at around $282 million. The net present value would be close to $1.28 billion.
By assuming a terminal EV/FCF ratio of 32.5x, I anticipate a NPV of the residual value of $4.13 billion. Finally, the enterprise value would stand at $5.412 billion with an equity valuation of $4 billion and a fair price of $107 per share.
Source: Malak's Expectations
Risks
Although Ingevity's products and proposition are undoubtedly innovative, the company faces a high degree of competition in lower cost products and the possible appearance of new technologies that replace the application of its products. If the company’s products don’t find demand, I believe that we could see less revenue growth than expected, which may lower the company’s stock valuation.
To this we can add the risks of international operations and the regulations or requirements in the production of highly complex chemical compounds. The dependence on different suppliers of critical materials in its supply chain, the always existing possibility of suffering from environmental complications in the transport of these products, or conflicts due to the emergence of new laws in regulation of its application are also worth noting.
Ingevity may also suffer from a decline in the vehicle automobile production levels driven by macroeconomic factors including interest rates increases, increase in the price of oil, consumer confidence, or employment trends.
Sales of our automotive activated carbon products are tied to global internal-combustion-engine and hybrid electric vehicle automobile production levels. ICE and HEV automotive production in the markets we serve can be affected by macro-economic factors such as interest rates, fuel prices, shifts in vehicle mix (including shifts toward alternative energy vehicles), consumer confidence, employment trends, regulatory and legislative oversight requirements, and trade agreements. Source: 10-k
Declines in expenditure of government infrastructure spending all over the world could significantly damage Ingevity’s revenue from customers offering paving services. Considering that the company is present all over the world, it is quite probable that government expenditures may decline somewhere, and damage Ingevity’s revenue line.
Our customers provide paving services to, for example, the governments of various jurisdictions within North America, South America, Europe, China, Brazil, and India, and we sell pavement marking materials to the governments of various jurisdictions within North America, and revenue either directly or indirectly attributable to such government spending continues to remain a significant portion of our revenues. Source: 10-k
Takeaway
Ingevity is a diversified conglomerate providing different products all over the world, which I think mainly makes the net sales less volatile than that of competitors. It is also worth noting that Ingevity operates in exciting target markets like that of applications in all-electric and hydrogen fuel cell vehicles, which may bring significant FCF generation in the next decade. I obviously see risks from a decline in government spending, lack of innovation, or risks related to the total amount of debt. With that, I believe that there is still an upside potential in Ingevity’s stock valuation.
For further details see:
Ingevity: Beneficial Guidance Driven By Increased Automotive Production And Cheap