Chemicals: Macro stars aligned
Materials
Global economic stimulus, a weakening USD, rising vaccination rates and lean inventories are perfectly aligned for continued commodity chemical strength, with higher oil prices providing an additional tailwind. Multiple compression at Olin, Chemours, Huntsman and Tronox seems excessive, particularly when compared to earnings growth prospects. FCF yields at Venator, Braskem and Trinseo are very attractive. For 2022, Hassan Ahmed prefers companies that may benefit from activism/M&A-like catalysts (Braskem, Huntsman and Tronox), secular changes within their markets (Olin), or have underappreciated proforma earnings power (Trinseo and Westlake).
Materials
Major portfolio transformation underway, valuation rerating is imminent - since taking the helm in 2019, CEO Frank Bozich has been focused on boosting the company's overall profitability profile while reducing earnings cyclicality by assimilating not only high-margin and stable businesses but also businesses that are relatively asset light. The net impact of these acquisitions (and divestitures) will result in an EBITDA margin of 15.6% (vs. ~10% 2018-20). TSE shares currently trade at a consensus 2022 EV-to-EBITDA multiple of 2.7x and a highly attractive FCF yield of 27%. TP $70.00 (35% upside).
Trinseo (TSE US) US
Materials
Alembic’s analysis suggests that the consensus is either baking in no recovery in 2022 from already deflated H2’21 estimates or not fully factoring in the earnings accretion from the PMMA acquisition - or both! Believes the PMMA deal could be as much as 13% accretive to 2022 EPS; while TSE’s main segments continue to rebound at a healthy clip and product spreads remain favourable. The shares are also currently trading at an attractive FCF yield in the high-teens. Raises TP to $90 (40% upside).
