Category: Financial Markets

Business Strategy and Outlook 

Celanese is the world’s largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. These products are used in the company’s specialized end products or sold externally. Celanese produces these commodity chemicals in its acetyl chain segment (roughly 45% of 2022 pro forma EBITDA including acquisitions), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. Celanese’s Clear Lake, Texas, plant benefits from a cost-advantaged feedstock from low-cost U.S. natural gas. The company plans to expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower unit production costs relative to other geographies. The engineered materials, or EM, segment (45%) produces specialty polymers for a wide variety of end markets. Celanese is investing in the expansion of this business through acquisition. The company completed the acquisition of Santoprene in late 2021 and announced plans to acquire the majority of DuPont’s mobility and materials portfolio in a deal that should close by the end of 2022. Both deals add complementary products to Celanese’s existing portfolio. After the DuPont acquisition closes, the EM segment will generate the majority of revenue.

The automotive industry will account for the majority of EM segment revenue, while other key end markets include electronics. EM uses commodity chemicals, such as acetic acid, methanol, and ethylene to produce specialty polymers. Celanese should benefit from automakers light weighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also see growth from increasing electric vehicle and hybrid adoption, as the company will sell multiple components specific to these powertrains. By 2030, the two thirds of all new global auto sales will be EVs or hybrids. 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 Celanese’s acetate tow sales will slightly decline over the long term.

Financial Strength

Celanese is currently in excellent financial health. As of June 30, the company had around $3.8 billion in debt and $0.8 billion in cash. The net debt/operating EBITDA ratio of around 1. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase its engineered materials portfolio, such as the Santoprene business from ExxonMobil. To continue this transformation, the company plans to acquire the majority of DuPont’s mobility and materials portfolio for $11 billion in cash, which will be largely financed through debt issuance. As a result, Celanese will carry elevated leverage ratios over the next several years from the time the deal closes, which will be the end of 2022. However, management will likely use excess cash to pay down debt. As EBITDA grows and debt levels fall, Celanese will be able to restore its balance sheet health within a few years of the deal closing. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, with the Santoprene and DuPont mobility and materials acquisitions, the more stable downstream engineered materials business will become the majority of total profits. As a result, Celanese should still generate positive free cash flow well in excess of dividends even in an economic downturn.

Bulls Say’s

• Celanese built out its core acetic acid production facilities at a 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. 
• Through acquisition, Celanese will transform the engineered materials business into a premiere chemicals business that will create value for shareholders.

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)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

AGL Energy is one of Australia’s largest integrated energy companies. It has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. AGL Energy’s planned demerger was scrapped and the firm is undergoing another strategic review, with a focus on decarbonization strategies to keep banks happy. AGL Energy’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market. AGL Energy’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.

Financial Strengths

AGL Energy is in reasonable financial health, but banks are increasingly reluctant to lend to coal power stations because of risks to their reputations. This poses a risk despite the firm’s relatively conservative credit metrics. From 1.4 times in 2020, net debt/EBITDA increased to 2.3 times in fiscal 2022 as earnings fell. Nonetheless, net debt/EBITDA is in line with Australian and New Zealand peers, and reasonable. The rapid improvement to a conservative 1.5 times in fiscal 2024. Funds from operations interest cover was comfortable at 13 times in fiscal 2022, comfortably above the 2.5 times covenant limit, and should remain strong as earnings growth offsets expectations for costs of debt to rise. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. Dividend payout ratio is 75% of EPS, though may be cut to help fund investment in renewable energy.

Bulls Say

• As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive. 
• Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds. 
• Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Company Description

AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 4 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.