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Technology Stocks

The Semiconductor Shortage Is Holding Back Ford’s June Sales

The semiconductor shortage ravaging the auto industry should bottom out in mid-2021, so gradual inventory improvement throughout the year, though a full recovery to take until 2022 or even 2023. The good news is that demand is excellent, with many consumers ready to spend money after holding back vehicle spending last year due to the pandemic.

Ford reported June sales on July 2 that showed the semiconductor shortage is hurting it notably worse than the rest of the industry. Management has repeatedly cited the impact of the Renesas plant fire in Japan as a major problem for Ford. June sales fell year over year by 26.9%, which far underperformed the industry’s 17.8% growth. We don’t see Ford having poor demand. The problem is low supply caused by the semiconductor shortage. With time Ford’s sales to be stronger in the second half of 2021 than the first half. First-half sales rose by 4.9% versus first-half 2020 (which is an easy comparable due to the pandemic), with about equal growth at the Ford and Lincoln brands. The 4.9% lags GM’s first-half 2021 growth of 19.8%. Ford’s first-half volume is down by about 20% from the first half of 2019. The best bright spot in Ford’s June sales is the Lincoln Navigator SUV, which grew volume by 15.5%. Lincoln’s SUVs had a first half of the year sales record, with retail channel sales up 23.3% year over year. June F-Series sales fell by 29.9%, and the company now has over 100,000 reservations for the all-electric F-150 Lightning due next year.

Company Profile

Ford Motor Co. manufactures automobiles under its Ford and Lincoln brands. The company has about 14% market share in the United States and about, 7% share in Europe. Sales in North America and Europe made up 69% and 19.5% of 2020 auto revenue, respectively. Ford has about 186,000 employees, including about 58,000 UAW employees, and is based in Dearborn, Michigan.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Bega Cheese’s Strength isn’t Strong Enough to Justify a Financial Moat

Competitive pressures from branded peers, niche operators, and private label products and a reliance on powerful supermarket customers will weigh on Bega’s ability to increase prices, leading to potential market share and margin deterioration. Despite the firm’s strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of Bega’s sales over the next decade, exposing the firm to commodity pricing and volatile input costs.

In November 2020, Bega entered an agreement to acquire Lion Dairy and Drinks from Kirin Group for AUD 534 million with the deal expected to be finalized in January 2021. Revenue from the branded segment, which includes spreads and grocery products and Lion’s Dairy and Drinks portfolio, to expand at a CAGR of 7.4% to fiscal 2025, underpinned by new product innovation and bolt-on acquisitions. Historically, Bega Cheese has made limited investment in its brands, particularly in Australia where Fonterra is the licensee of the Bega brand, however since acquiring the spreads and grocery business in 2018, marketing spend as proportion of revenue has increased to 3% from 1% and it to remain the higher level.

Bega Cheese’s Supply Chain and Manufacturing

At least 70% of Bega’s energy consumption is from fossil fuel generation. But these risks are immaterial to our unchanged AUD 5.00 per share fair value estimate and high uncertainty rating. Bega Cheese already operates in a highly competitive market, with a largely commoditized product offering and high private label penetration in key categories. Bega Cheese’s supply chain and manufacturing is heavily reliant on water, exposing the company to increased water costs and community backlash from inefficient water use.As pressure mounts to reduce global carbon emissions, there is the potential for a reintroduction of regulated carbon pricing in Australia, however, this is not factored into our base case. Extreme weather events such as droughts and bushfires may result in higher input costs, margin deterioration from reduced production volumes, disruptions to the supply chain and increased scrutiny on resource use. Climate change risk may lead to extreme weather in the short term or changing climate patterns longer-term impacting its supply chain and input costs. Management is certainly diversifying Bega Cheese’s product offering and building out the branded business through acquisitive growth in recent years

Financial Strength

Bega’s balance sheet will be stretched following the acquisition of Lion Dairy and Drinks, with pro forma net debt/EBITDA on a post AASB 16 basis deteriorating to 3.3 (from 2.3 pre-acquisition). Bega funded the acquisition through a AUD 401 million equity raising and AUD 267 million of new and extended debt facilities. The balance sheet to gradually deleverage as synergies are delivered, earnings improve and noncore assets are divested, with net debt/EBITDA falling to below the firm’s target of 2 by fiscal 2024. Bega will continue to explore potential bolt on acquisitions and partake in industry rationalisation. While the timing and scale of further acquisitions is uncertain, Bega has the capacity to pursue smaller acquisitions while maintaining a dividend payout ratio of 50% normalised EPS.

Changing Consumer Trends

  • Bega is shifting investment to the spreads and grocery business, which we view as less commoditised and higher margin than dairy, with strong niche positions in Vegemite and peanut butter
  • External factors outside of Bega’s control, such as the weather, can adversely impact supply and demand dynamics. This can impact commodity prices, inputs costs and the firm’s supply chain and lead to volatile earnings
  • Changing consumer trends toward dairy-free and vegan diets could lead to declines in per-capita dairy and cheese consumption, weighing on the majority of Bega’s earnings

Company Profile

Bega Cheese is an Australian based dairy processor and food manufacturer of well-known brands including Bega Cheese and Vegemite. On a pre-acquisition of Lion’s Dairy and Drink’s basis, the firm generated approximately 70% of sales from its domestic market, with the remainder from exports to over 40 countries, predominately in Asia. Bega Cheese operates two segments: the branded segment which produces consumer packaged goods primarily sold through the supermarket and foodservice channels and the bulk segment which produces commodity dairy ingredients primarily sold through the business-to-business channel.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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ipo IPO Watch

Following Over Subscribed IPO, Resource Base to Acquire Black Range Metal Project

Black Range Acquisition

Following the completion of an initial public offering (IPO) and planned relisting on the Australian Securities Exchange, junior minerals company Resource Base will pursue an aggressive exploration campaign at the potential Black Range base metals property in northwest Victoria.

In February, Resource Base obtained a conditional right to purchase Black Range from its present owner, Navarre Minerals (ASX: NML). The firms reached a definitive agreement under which Navarre will dispose the non-core asset in exchange for $1.52 million in Resource Base shares upon listing.

A second tranche of 2.5 million shares will be awarded to Navarre upon the announcement of a JORC resource of 100,000 tonnes within five years, and a third 6 million share tranche will be issued upon the delivery of the project’s comprehensive feasibility study.

Eclipse Prospect

After the acquisition is completed, Resource Base will conduct exploration, pre-feasibility studies, and bankable feasibility studies on the project to show the commercial viability of a mining operation.

The Eclipse opportunity, which sits in the Stavely corridor and is considered prospective for volcanic-hosted massive sulphide mineralisation, is Resource Base’s priority objective within the project.

The first two years as a public business will also include evaluating fresh exploration and acquisition prospects, as well as completing studies for near-term copper and gold production.

“The company will also consider further merger and acquisition activity where appropriate, with a view to growing the company and creating further value for shareholders.”

Company Profile

Resource Base Limited is a mineral exploration company focused on the acquisition and development of highly prospective exploration projects with demonstrated potential for scalable discoveries.

(Source: Small Caps)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Property

Recent Acquisitions and Divestments Have transformed Charter Hall Retail REIT’s Portfolio

The group also recently announced another acquisition, spending AUD 51.2 million to buy the Butler Central Shopping Centre in Western Australia. Purchased on a 6% cap rate, which is about in line with our estimated yield on Charter Hall Retail REIT.

Recent acquisitions and divestments have transformed Charter Hall Retail REIT’s portfolio. AUD 177 million portfolio of shopping centers was sold in fiscal 2020. Then in July 2020, the REIT acquired a stake in a Coles distribution centre with 14 years remaining on the lease, with fixed annual rental uplifts of 2.75%. As at June 30, 2020, Woolworths was the largest tenant, representing 18% of income, but we expect Coles will be the largest tenant by the end of fiscal 2021. Aldi is also likely to rise in our view (currently 2% of income), via store numbers increasing in Charter Hall’s portfolio. And BP now represents about 12% of rental income, from zero a year ago. Wesfarmers will likely decline
Slightly as a result of Target stores closing or converting to Kmarts.

Rent is Charter Hall Retail REIT’s dominant revenue driver. Unlike many other Australian REITs, it does not operate any meaningful funds management business, and is unlikely to do so given funds management opportunities are housed in the head stock Charter Hall.

Financial strength
Charter Hall Retail REIT is in reasonable financial health after raising equity in April and May 2020, bolstering the balance sheet. Gearing reduced from near 40% in December 2019 to 35% in December 2020 (as measured by look-through gearing, which is net debt/assets, including debt obligations in underlying vehicles). The covenant of most concern is over an underlying fund, not the entire REIT. It specifies that gearing within that fund is limited to 55%. The fund is already geared to at 40.5%. That implies that a 25% fall in asset values would see that fund flirting with a breach. This fund represents only a small portion of the REIT’s overall assets, so we estimate leverage problems there could be solved by a modest cash injection into the fund – that should be affordable given manageable gearing at the REIT level of 35% (December 2020).

Bulls Say
• Well over half of revenue comes from tenants that we consider to have a low likelihood of missing rent payments. Combined with long leases on anchor tenants, CQR’s income is relatively resilient.
• Interest rates look set to remain lower for longer, suggesting that the market will maintain low discount rates on property assets that can generate income.
• Good anchor tenants generate foot traffic, and Charter Hall Retail charges rent well below levels in high-end discretionary focused shopping malls, suggesting less vulnerability to e-commerce.

Company profile
Charter Hall Retail REIT, or CQR, owns and manages a portfolio of convenience focused retail properties, including neighborhood and sub regional shopping centers, service stations, and some retail logistics properties. The REIT is managed by Charter Hall, a listed, diversified fund manager and developer, which owns a minority stake in CQR, and frequently partners with it on acquisitions and developments. More than half of rental income comes from major tenants Woolworths, Coles, Wesfarmers, Aldi and BP (the latter occupies service station assets). The portfolio is more seasoned than some convenience rivals, with approximately two thirds of supermarket tenants at or near thresholds for paying turnover-linked rent.

(Source: Morningstar)
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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Sustainalytics Rated Weibo – Medium ESG Risk

daily newspaper and a magnifying glass to find news

Weibo’s recent content enhancements include video accounts (similar to Weixin’s), video pages with both professionally generated content and user-generated content (similar to YouTube channels), the discovery zone (where users can find the popular discussion topics at the main entrance of Weibo), and vertical videos focused on user-generated content.

With the increasing importance of more focused marketing and return on investment for advertisers, Weibo has started to catch up. For example, Weibo introduced optimized cost per x model in 2019. Advertisers can also evaluate their sales conversion on Tmall from the fans accumulated through advertising campaigns on Weibo in collaboration with Alibaba through the uni-marketing program. We expect to see increasing product development costs in the next few quarters. We believe investment in research and development is vital for Weibo even if that means near-term margin compression.

To improve small and medium-size enterprise ad revenue, Weibo is expanding into untapped and faster-growing verticals such as Taobao merchants, online education, and online gaming by restructuring its sales team since 2019. For example, it has enhanced cooperation between sales and technical teams to provide customized services to top SMEs of key verticals. The success of the new model is unclear because of the disruption from COVID-19.

Financial Strength

Weibo has a strong balance sheet with a net cash position of $1.06 billion as of December 2020. The company started to make a profit in the second quarter of 2015. Operating leverage has increased significantly in recent years; the operating margin improved from 7.8% in 2015 to 25.5% in 2018 and 30.0% in 2020. This has helped the company to generate free cash flow from 2015 to 2020. The company has significantly beefed up its cash war chest through operating activities and note issuances in the past few years. The balance sheet displayed an increase in long-term investments from $695 million in December 2018 to $1,179 million in December 2020, while generating operating cash flow of $742 million during 2020. We expect Weibo to continue to make long-term strategic investments with its cash. We do not expect it to pay dividend in the next few years. As of March 30, 2021, Moody’s assigned a Baa2 (previously Baa1) issuer rating to Weibo with a stable outlook (previously negative). Moody’s been concerned about using Weibo’s assets and cash to service or repays the privatization debt of Sina.

Bulls Say

  • Weibo has been able to sustain its status as the go to platform for following top trends and topics and celebrities.
  • Weibo puts more focus on return on investment for advertisers and now provides optimized cost per x.
  • Weibo upgraded its ad platform to enhance marketing scenarios, ad formats, algorithms, and Big Data analysis to increase its competitiveness.

Company Profile

Weibo is the largest social media platform in China. As of 2020, Weibo had 521 million monthly active users and 225 million daily active users, many of whom are drawn there by the millions of key opinion leaders in entertainment, sports, and business circles. Sina is the major shareholder, holding 44.7% of shares and with 70.8% voting power; Alibaba holds 29.8% of shares and 15.7% voting power

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Asbestos Ringfence Doesn’t Alter Our Long-Term View of ITT, but it simplifies the business

After reviewing the terms of the deal and modeling it in the background based on pro-forma, we don’t expect to materially alter our FactSet consensus low fair value estimate of $89 per share (the math in our model currently suggests a reduction in the intrinsic value of about $1).

However, we await further details in order to re-publish our model. While the company estimates an after-tax loss of $27 million in the second quarter, according to the 8-K filing, it’s still evaluating the accounting for the transaction.

At a high level, the terms of the deal are rather simple. The deal effectively ringfences ITT from further asbestos-related and other product liabilities, as the indemnification provisions aren’t subject to any cap or time limits. ITT contributed approximately $398 million of cash to InTelCo, which is the subsidiary that holds these liabilities, in order to adequately capitalize the entity. As part of the deal, ITT’s balance sheet removes all asbestos obligations and related insurance and deferred tax assets as of July 1. Delticus, Warburg Pincus’ investment vehicle, will assume the operational management of InTelCo, including the administration of all asbestos claims.

While the deal may negligibly reduce our fair value, we like that it allows ITT to close a chapter on having to manage this legacy liability. The transaction simplifies the balance sheet, removes a layer of investor uncertainty, including “known unknowns,” and allows ITT to focus on its core operations. From that standpoint, the deal is a win

Company Profile

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spin-offs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(Source: Morningstar)

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Global stocks

Sparkling Finish to Fiscal 2021 for National Beverage, But Shares Fairly Valued

Nevertheless, while not capable of sustaining the frothy valuation of yesteryear, the firm produced record results (largely in line with our expectations on both the top and bottom lines) that continue to inspire confidence in the sustenance of its growth profile and brand equity. We don’t plan to materially change our $48.50 fair value estimate, as time value and better-than-expected commercial execution should be offset by higher taxes, as we incorporate Morningstar’s probability-weighted house expectation of an increase in the U.S. statutory rate to 26%. Despite being well off their highs, we don’t see a sufficiently compelling margin of safety in the shares at current levels, and suggest prospective investors remain on the sidelines.

Revenue for the fiscal year came in at $1.1 billion, up 7% year over year. Anchor brand La Croix remained the preeminent driver of growth, though we suspect the firm’s energy and carbonated soft drinks brands also grew nicely. As pandemic-besieged sales channels where LaCroix is underindexed–like food-service and vending–continue to rebound, we don’t see much adverse impact manifesting on the top line; if anything, there could be incremental upside given management’s ambition to broaden the aperture of its sales and consumption occasions. These efforts, together with attractive sparkling water category dynamics, should facilitate mid-single-digit growth longer term, supported by ongoing reinvestment in innovation

Operating margins were stellar, up 460 basis points to 21.2%. While operating leverage always plays a role in quarters with top-line strength (given that it owns most of its production/distribution apparatus), lower advertising and corporate expenses remain anomalous contributors that should become headwinds longer term as the competitive landscape re-intensifies post-pandemic.

Company Profile

National Beverage is one of the top 10 non-alcoholic beverage companies in the U.S. Its portfolio skews toward functional drinks (i.e. those purporting to offer health benefits) and is anchored by the popular LaCroix sparkling water trademark. Other offerings include Rip It energy drinks, Ever fresh juices, and soda brands like Shasta and Faygo. The firm controls most of its production and distribution apparatus, with very little outsourcing. In terms of go-to-market, it uses warehouse distribution for big-box retailers, direct-store-delivery for convenience stores and other small outlets, and food-service distributors for the food-service channel (schools, hospitals, restaurants). It is controlled by chairman and CEO Nick Caporella, who owns over 73% of the common stock.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights

Smucker – Long Run Benefits Should Be Gained From Increased Pet Adoption and Flexible Work Arrangements

. Collectively, pet food and coffee comprise nearly 70% of Smucker’s sales. Despite this benefit, we forecast just 2% annual sales growth for the firm (less than that of the total at-home feed and beverage industry), as Smucker’s high exposure to mainstream and value segments in pet food and coffee should result in continuing market share losses as consumers are trading up to premium offerings. Smucker is attempting to offset this pressure with products more aligned with consumer trends, such as Uncrustables on-the-go snacks, it will take a few years for these smaller brands to move the needle.

Financial Strength

The Big Heart Pet Brands acquisition in 2015 increased the net debt/adjusted EBITDA ratio to above 6 from 2. Smucker paid $5.9 billion for the business, 13 times EBITDA, which we believe was rich, particularly considering the acquired brands’ poor positioning in the category. We believe management was prudent in its decision to sell the nonstrategic canned milk business shortly thereafter for $194 million to free up capital in order to accelerate debt reduction. Share repurchases were also significantly curtailed in 2015, which we view as sensible. Net debt to adjusted EBITDA declined to a manageable 2.8 times by 2018, in our opinion, before the firm announced it was acquiring pet food producer. Smucker’s free cash flow (CFO less capital expenditures) as a percentage of revenue has averaged high single digits to low double digits historically, and we expect similar results going forward. With net debt/adjusted EBITDA below 3 times, the firm’s priorities for cash are dividends, capital expenditures, acquisitions, and share repurchase. In the past 10 years, Smucker has averaged a 50% dividend payout ratio (in line with peers), and we expect it will continue to do so; our forecast anticipates 2%-6% annual dividend increases.

Bulls Say

  • A significant increase in R&D and marketing (and increasing productivity of those investments) should enhance Smucker’s capabilities, helping it capitalize on consumer trends.
  • During the pandemic, consumers adopted 11 million pets and purchased 3 million coffee machines, which should provide a lasting benefit for categories representing nearly 70% of Smucker’s fiscal 2021 sales.
  • Executive leadership changes (newly created chief operating officer role, leadership changes for the U.S. sales organization and the pet food segment) should improve execution and enhance accountability.

Company Profile

J.M. Smucker is a packaged food company that primarily operates in the U.S. retail channel (88% of fiscal 2021 revenue), but also in U.S. food-service (5%), and international (7%). Its largest category is pet food and treats (36% of 2021 revenue), with popular brands such as Milk-Bone, Meow Mix, 9Lives, Kibbles ‘n Bits, Nature’s Recipe, and Rachael Ray Nutrish. Its second-largest category is coffee (33%) with the number-two brand Folgers and number-six Dunkin’. Other large categories are peanut butter (10%), with number-one Jif, fruit spreads (5%) with number-one Smucker’s, and frozen hand-held foods (5%) with number-one Uncrustables.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Shaw and Roger’s Merger is Expected to Close in 2022, But Regulatory Approval is Not Certain

investment stockbroker risk analysis. Financial analysis using phone app and laptop. Market trading profit.

Shaw has made significant efforts to improve its wireless network and is now bundling wireless with wireline service to customers in its cable footprint, enabling it offer even better value and enhancing service when offloaded onto its Wi-Fi network. Between the ends of fiscal years 2016 and 2020, Shaw more than doubled its postpaid wireless subscriber base, increased average billings per user (ABPU) by 20%, and expanded its wireless EBITDA margin by 900 basis points. The firm continues to invest heavily to improve its wireless network, and we think the firm is a legitimate competitor for new wireless customers and will continue seeing wireless results trend upwards.

Shaw ended fiscal 2020 with 5.3 million wireline revenue generating units, or RGUs, down from 6.4 million RGUs in 2012. The losses are attributable to television and voice customers, which face secular challenges for all competitors, but even Internet customer growth has been anemic (up 2% since 2017, including customer losses in 2020). Shaw has materially underperformed Telus across all types of RGUs. Telus has grown its Internet customer base by 22% since 2017 while also adding television customers. Its RGU base has grown from to 4.5 million from 3.8 million in 2012.

Shaw’s total revenue was up 5% year over year, though growth would’ve been only 3% excluding a benefit from a recent regulatory decision. The firm’s EBITDA margin was up 30 basis points year over year but was significantly better. Average billings per user, or ABPU, was down to CAD 40.56 from CAD 44.27 in the year-ago period. We’ve expected significant ABPU compression as the firm pushes Shaw Mobile, where Shaw’s wireline customers can add wireless service for extraordinarily low prices, but the 8.5% drop was more than we anticipated, especially given that net additions were muted. The firm added fewer than 47,000 postpaid wireless subscribers.

Financial Strength

Shaw is currently in a good financial position, which we think is critical, as it will need the flexibility in the coming years. At the end of fiscal 2020, Shaw had over CAD 700 million in cash and CAD 4.5 billion in long-term debt, which represented 1.6 times net debt to adjusted EBITDA—below its target ratio of 2.0-2.5 and well below those of Shaw’s big competitors in its industry. Shaw’s coverage ratio (adjusted EBITDA to interest expense) ended 2020 at 8.7, and the company has CAD 1.5 billion available on a revolving credit facility. Shaw has no long-term debt maturing until the end of 2023.

Wireless competition

  • Shaw is doing all the right things to build up its wireless business, acquiring and building out sufficient assets and luring customers by offering great deals.
  • The Canadian government is keen on bringing wireless competition to the big three incumbents. Unlike previous national upstarts, Shaw’s strong financial position and family control afford it the time and money to stick with a long-term strategy to succeed.
  • Shaw’s move to bundle wireless and wireline service with Shaw Mobile could expedite its wireless share gains and stem wireline losses it has seen recently.

Company Profile

Shaw Communications is a Canadian cable company that is one of the biggest providers of Internet, television, and landline telephone services in British Columbia, Alberta, Saskatchewan, Manitoba, and northern Ontario. In fiscal 2020, more than 75% of Shaw’s total revenue resulted from this wireline business. Shaw is also now a national wireless service provider after acquiring Wind Mobile in 2016. Shaw has upgraded its wireless network, undertaken an aggressive pricing strategy, and significantly enhanced its spectrum holdings. As a smaller carrier, Shaw has favored bidding status in spectrum auctions, giving it a further boost in enhancing its wireless network. At the 2019 auction, Shaw added significant amounts of 600 MHz spectrum to the 700 MHz spectrum it is currently deploying.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Celanese’s Low Acetic Acid Production Should Support Growing Specialty Polymer Demand

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Celanese produces the chemical in its core acetyl chain segment (roughly 50% of EBITDA), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. It produces acetic acid from carbon monoxide and methanol, a natural gas derivative. Celanese produces its own methanol at its Clear Lake, Texas, plant, which benefits from access to low-cost U.S. natural gas. The company recently announced that it will expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower average unit production costs.

The engineered materials segment (around 40% of EBITDA) produces specialty polymers for a wide variety of end markets. This segment uses acetic acid, methanol, and ethylene to produce specialty polymers. Celanese and other specialty polymer producers have benefited in recent years from automakers lighweighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also benefit from increasing electric vehicle and hybrid adoption, as then company makes battery separator components. By 2030, we forecast two thirds of all new global auto sales will be EVs or hybrids. Additionally, Celanese sells products used in electronics and “Internet of Things” technologies, which provides another area of growth for the company.

With growing EV adoption and increased sales of Internet of things technologies, Celanese is well positioned for outsize engineered materials’ volume growth over the next several years. Acetate tow, which is Celanese’s smallest segment, produces acetate tow primarily for cigarette filters. Cigarette sales are in secular decline across most countries, and so we expect Celanese’s acetate tow sales will slightly decline over the long term.

Financial Strength

Celanese is in good financial health. As of March 31, 2021, the company had $3.6 billion in debt and around $0.8 billion in cash. A net debt/operating EBITDA ratio of 1.8 times. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase the company’s engineered materials portfolio, such as the Santoprene business from ExxonMobil. The company will increase its debt as a part of this acquisition. However, we generally expect the company’s balance sheet and leverage ratios to remain healthy as Celanese should generate enough free cash flow to meet its financial obligations. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, Celanese should still generate positive free cash flow well in excess of dividends in 2021.

Core Acetic Acid Production

  • Celanese built out its core acetic acid production facilities at significantly lower capital cost per ton than its competitors thanks to the scale of its facilities (1.8 million tons versus average 0.5 million tons).
  • Celanese should benefit from producing an increasing proportion of its acetic acid in the U.S. to take advantage of low-cost natural gas.
  • The engineered materials’ auto business should grow more quickly than global auto production because of greater use of these products in each vehicle.

Company Profile

Celanese is one of the world’s largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.