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Property

Hotel Property Investments’ Outlook Is Depressed by Rising Interest Rates

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Business Strategy & Outlook

A key attraction of Hotel Property Investments is favorable lease terms that provide predictable above-inflation rental income from long-term leases to joint venture entity Queensland Venue Company, which is an agreement between supermarket giant Coles and private equity owned (Kohlberg Kravis Roberts) Australian Venue Company. AVC manages the day-to-day operations of the hotels, with Coles needing the hotel licenses to operate its liquor retailing business under restrictive Queensland laws. There is ongoing uncertainty around Coles’ longer-term strategy regarding its liquor business following competitor Woolworth’s decision to exit its liquor and hotel businesses. Close to 90% of Hotel Property’s freehold properties are in Queensland, predominantly pubs that are leased to QVC. The joint venture leases generate about 90% of Hotel Property’s rental income. Since annual rents are not linked to earnings, investors do not generally benefit from the upside of stronger pub operating performance and face the downside risk of the joint venture not renewing leases on poorly performing pubs. 

Although this risk has been substantially alleviated due to the renewal of most leases for an extended 10- to 15-year period. The further trade-off is the defensive nature of the long lease terms, and strong tenants that generate above-inflation rentals with low maintenance costs. Most properties are on attractive triple-net lease terms where the tenant is responsible for most expenses other than land tax in Queensland, which recently increased. The portfolio currently has a weighted average lease term of about 10 years. Hotel Property is the ultimate holder of hotel licenses on most properties. These licenses allow the sale of liquor at up to three detached bottle shops within 10 kilometers of the main premises. Licenses revert to Hotel Property at the end of the lease term with respect to most pubs. Where the joint venture owns the license but opts to terminate the lease, Hotel Property has right of first refusal over the license at a preset price tied to trading data at that time.

Financial Strengths

Hotel Property is in sound financial health, with gearing (debt less cash/total assets less cash) of about 35% at the end of fiscal 2022, well below covenant gearing of 60% and within its target gearing of between 35% and 45%. It is also comfortably meeting its interest cover covenant of 1.5 times, with current interest cover (earnings before interest and tax/interest expense) of above 3.5 times. Debt maturity profile is fairly long at 4.1 years. The recent rise in interest rates could significantly increase interest expenses in the medium term because about 45% of all debt is fixed rate and begins to mature in 2025.

Bulls Say

  • Hotel Property Investments’ distribution yield is higher than most Australian REIT peers, supported by most contracted annual rental increases averaging the lesser of 2 times CPI or 4%. 
  • Rental income is underpinned by long lease terms. 
  • Liquor and most gaming licenses are retained by Hotel Property when leases expire. This is a contingent asset that should be a draw-card for potential pub tenants in the absence of adverse regulatory changes.

Company Description

Hotel Property Investments is an Australian REIT with a portfolio of freehold pub properties primarily in Queensland. Its portfolio is almost exclusively leased to Queensland Venue Company on triple-net long-term leases where the tenant is responsible for outgoings (except land tax in Queensland), resulting in relatively low maintenance expenses. Most leases also provide for annual rental increases typically at the lower of 4% or two times the average of the last five years consumer price index.

(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.

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Commodities Trading Ideas & Charts

SQM’s Growing Lithium Capacity Should Benefit From Higher Prices as EV Adoption Rises

Business Strategy & Outlook

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, the high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities. SQM is the top three lithium producers globally. The company is in the midst of expanding its lithium carbonate production capacity to at least 250,000 metric tons from 70,000 in 2019. SQM is also investing in lithium hydroxide production in Australia through a joint venture with Wesfarmers, Covalent Lithium, which will be a fully integrated spodumene-based lithium hydroxide producer. The first part of the project entered production in the mid-2020s, with a capacity expansion in the second half of the decade. Unit costs should sit on the lower half of the lithium hydroxide cost curve. SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. Specialty potash demand should benefit from the shift in emerging-market diets to higher-value foods. While specialty fertilizer prices tend to move in line with commodity potash prices, they have been less affected by movements in commodity potash prices. SQM is also a small player in commodity potash. SQM is the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films. Iodine demand has grown 3% annually over the past decade and should continue to grow at this pace as healthcare spending rises with aging populations. SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy, which caused iodine prices to fall. After higher-cost supply reduced production and SQM achieved its market share goals, the company is now acting as a rational player and prices have increased since 2018.

Financial Strengths

SQM is in excellent financial health. As of June 30, 2022, cash and cash equivalents, including current financial assets, and total debt both stood at roughly $2.6 billion. SQM’s debt position has grown in recent years as the company is in the midst of quadrupling its Chilean lithium capacity, funding development of its Australian lithium joint venture project, and expanding its fertilizer and iodine production capacities. The company plans to spend over $2 billion in capital expenditures from 2021 to 2024 to support these growth initiatives. To help fund these investments, the company issued $1.1 billion in equity in early 2021. However, given the recent rise in lithium, fertilizer, and iodine prices, it is expected SQM will be able to pay for the remaining capital expenditures with cash generated from its operations. Ultimately, the company’s balance sheet remains healthy as profits grow from the increased volumes and higher lithium prices. SQM’s dividend varies each year. It is calculated as a percentage of net income that ranges between 50% and 100% depending on balance sheet metrics, including total current assets divided by total current financial liabilities and total liabilities minus current financial assets divided by total equity. While SQM’s dividend will fluctuate from year to year, the company will generate enough cash flow to meet all of its financial obligations, including dividends.

Bulls Say

  • SQM’s crown jewel is its Salar de Atacama operation in Chile, which is the lowest-cost lithium deposit globally. Its capacity expansions at this resource should create long-term value. 
  • The company’s specialty fertilizer blends of potassium, nitrates, and sodium garner a premium to commodity fertilizers due to their use in high-value crops, including fruits and vegetables. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for SQM.

Company Description

Sociedad Quimica y Minera de Chile is a Chilean commodities producer with significant operations in lithium (primarily used in batteries for electric vehicles and energy storage systems), specialty and standard potassium fertilizers, iodine (primarily used in X-ray contrast media), and solar salts. The company extracts these materials through its high-quality caliche ore and salt brine deposits. SQM is also developing a hard rock lithium project in Australia.

(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.

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Dividend Stocks

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021

Business Strategy & Outlook

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets. Amcor has focused its portfolio on segments within flexible and rigid thermoplastics that feature attractive returns, largely underpinned by significant merger and acquisition, or M&A, activity. To this end, Amcor has completed 25 acquisitions since 2010 and is pushing forward with its largest transaction to date, making an all-scrip offer in August 2018 for leading U.S. flexibles player Bemis Co. 

Amcor divested its Australasian fiber, glass, and aluminum beverage can packaging businesses in conjunction with its North American fiber-packaging distribution business in December 2013, in order to focus solely on plastics. The focusing the portfolio on segments requiring more complex, greater value-add manufacturers that attract higher margins is entirely appropriate. In the longer term, the Amcor’s returns and moat benefit greatest from the scale in resin procurement that the enlarged group enjoys as a scale player in each of its geographies. The plastics industry remains a significantly fragmented industry in spite of the efforts of Amcor and other large regionally and globally active players to roll up the industry. Thus, resin procurement advantages for players with regional scale are both material and long-lasting, particularly in light of the mature nature of markets that the plastics industry sells into, where demand is derived from household consumption. Therefore, Amcor’s strategy positively and the key driver of returns on invested capital, or ROICs, have averaged 10.8% over fiscal 2016-20, comparing favorably with the weighted average cost of capital, or WACC, estimated at 7.9%. In the future, this advantage is to bolster Amcor’s positive ROIC-WACC spread, with ROICs expected to average 11% over fiscal 2021-25.

Financial Strengths

Amcor maintains substantial financial leverage but the defensive nature of packaging markets provides scope for relatively high gearing. Leverage–defined as net debt/EBITDA before IFRS-16 lease liabilities–stood at 2.7 times at fiscal 2022 year-end. With a free cash flow forecast of USD 1.2 billion in fiscal 2023, one commends Amcor’s freshly announced USD 400 million share buyback. Upon completion of the buyback, the leverage to remain at 2.7 times at fiscal 2023 year-end. In considering the use of leverage, Amcor aims to retain investment-grade credit ratings with credit ratings agencies S&P and Moody’s. Amcor speaks to a long-term leverage range of 2.25 – 2.75 times as sufficient to maintain its current credit ratings. However, net debt/EBITDA stood at 2.9 times at fiscal 2021 half year-end following the completion of the Bemis acquisition in fiscal 2020. Leverage is anticipated to recede as Bemis cost synergies are realized medium-term. Nonetheless, Amcor is comfortable running its balance temporarily above 2.75 times, noting that both S&P and Moody’s could downgrade Amcor one further notch and its debt would still retain a desired investment-grade designation. Given the highly defensive nature of Amcor’s business, this threshold for downgrade by the ratings agencies is likely in the range of 3.5 times to 4.0 times net debt/EBITDA. With leverage even under the bear case scenario–where Amcor’s volumes contract by circa 0.5% over the fiscal 2021 and fiscal 2022 period–leverage peaks at 2.8 times in fiscal 2025. Therefore, with Amcor not at risk of breaching its internal leverage targets, one can be confident that a breach of debt covenants in the current environment is highly unlikely.

Bulls Say

  • Amcor’s efforts to focus its portfolio toward more complex, greater value-added categories will lead to consistently higher margins. 
  • Exposure to emerging markets, with rapidly rising per capita incomes, helps offset Amcor’s mature demand from developed markets. 
  • Completion of the Bemis deal significantly augments Amcor’s existing flexibles portfolio, while adding additional scale in resin procurement.

Company Description

Amcor is a global plastics packaging behemoth, with global sales of USD 14.5 billion in fiscal 2022 following the acquisition of Bemis in 2019. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets.

(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.

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Technology Stocks

Carrier strives to reduce operating costs 2%-3% annually

Business Strategy and Outlook 

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. Carrier is a high-quality franchise with leading brands across most of its product portfolio. After the spinoff, Carrier increased spending on research and development, its sales organization, and capital projects to support product development and growth initiatives; this will help management accomplish its goal of mid-single-digit top-line growth over the midterm. Two of Carrier’s higher-profile growth initiatives include increasing its service attachment rate and becoming the leader in the applied HVAC market within five years. Carrier will successfully increase its service revenue, but it will be challenging to usurp Trane Technologies and Johnson Controls in the applied HVAC market.

Carrier’s HVAC segment (its largest segment at approximately 60% of sales) has the strongest long-term growth potential due to its commercial HVAC market exposure.  The commercial HVAC market will grow above GDP due to increased demand for energy-efficient and indoor air quality solutions. Residential HVAC demand remained robust in 2021-22, but there’s a cautious outlook. On the one hand, housing starts will rebound to 1.4-1.5 million units annually by 2025 after a near-term contraction in 2023-2024) and regulation changes (refrigerants and energy efficiency standards) should be a tailwind. On the other hand, the replacement cycle is maturing. Elevated investment spending, public company costs, and a challenging operating environment during 2020-21 due to the pandemic, supply chain disruptions, and cost inflation have pressured Carrier’s profit margins. However, Carrier strives to reduce operating costs 2%-3% annually. If the company can achieve its cost-cutting goal and expand its aftermarket mix, profit margins should improve, assuming healthy end-market demand and supply chains.

Financial Strength

After becoming a stand-alone entity following its April 2020 spinoff from United Technologies, Carrier now benefits from a narrowed strategic focus and complete autonomy over its capital allocation decisions. The company paid a price for its freedom; the separation left it saddled with a significant amount of net debt. However, Carrier generates significant free cash flow (about $1.7 billion annually over the last three years), and deleveraging has been a top capital allocation priority. In early 2022, Carrier completed the sale of Chubb, its service-centric fire and security business, for $2.7 billion net of taxes. Carrier expects to reduce debt by $750 million in 2022. At year-end 2021, Carrier had $9.7 billion of debt and $3.0 billion of cash on its balance sheet, which equates to a net debt/estimated 2022 EBITDA ratio of about 2. However, with the Chubb sale and Carrier’s 2022 free cash flow, the cash balance will swell to approximately $7.5 billion. Aside from paying down debt, the firm will allocate about $900 million to fund its acquisition of Toshiba’s remaining ownership stake in the Toshiba-Carrier joint venture, and management has earmarked $500 million for dividends and $1.6 billion for share repurchases in 2022. Carrier’s next maturing debt issuance isn’t until 2025, when its 2.242% $1.2 billion outstanding notes are due. Another $900 million is due in 2027, $2 billion is due in 2030, and $4.250 billion is due after 2030. Carrier’s debt maturities are well staggered, and no worries about solvency can be seen.

Bulls Say’s

  • After separating from United Technologies, Carrier is in full control of its destiny. Near-term reinvestment should boost its long-term growth prospects, and cost cutting initiatives should result in stronger profit margins. 
  • The company has significant franchise value with leading brands across most of its product portfolio. The flagship Carrier brand has demonstrable pricing power. 
  • In the wake of the coronavirus, air filtration, air-quality assessment, cold-chain solutions, and touchless access control solutions should become larger market opportunities.

Company Profile 

Carrier Global manufactures heating, ventilation, and air conditioning, refrigeration, and fire and security products. The HVAC business serves both residential and commercial markets (HVAC segment sales mix is 60% commercial and 40% residential). Carrier’s refrigeration segment consists of its transportation refrigeration, Sensitech supply chain monitoring, and commercial refrigeration businesses. The firm’s fire and security business manufactures fire detection and suppression, access controls, and intrusion detection products.

(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.

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Commodities

Celanese’s acetate tow sales will slightly decline over the long term

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)

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