Deutsche Bank
Markets Research
North America
United States
Industrials
Chemicals/Commodity
Periodical
Chemicals
Scorecard
Date
6 September 2017
August Scorecard
Eastman and Air Products outperformed in August
________________________________________________________________________________________________________________
Deutsche Bank Securities Inc.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.
David Begleiter
Research Analyst
(+1) 212 250-5473
david.begleiter@db
Katherine Griffin
Research Associate
(+1) 212 250-7265
katherine-a.griffin@db
David Huang
Research Associate
(+1) 904 520-5307
david-a.huang@db
Top picks
Eastman Chemical (EMN.N),USD85.27 Buy
Trinseo (TSE.N),USD67.95 Buy
Ashland (ASH.N),USD61.41 Buy
Source: Deutsche Bank
Valuation & forecasts
We value companies in the
chemicals sector based on: 1)
forward P/E multiples (vs. historical
ranges and the market); 2) forward
EV/EBITDA multiples (where leverage
diverges from that of peers, also vs
historical averages); 3) our
calculation of cash return on cash
invested and the strong correlation
(R270%) we have found between
chemical sector valuations and
returns on capital. Risks to our target
prices being achieved include rises in
energy, raw materials, n-t interest
rates or sharp improvement in end-
market demand.
US Chemicals rose 0.6% in August vs S&P up 0.05%. Notable outperformers in
August were Eastman (EMN, +3.7%, Buy) and Air Products (APD, +2.3%, Buy).
Eastman had a solid Q2 release highlighted by 5% V/M growth in its specialty
businesses (+7% in 1H) and YoY operating margin expansion despite not fully
recapturing higher raw material costs. We believe that the core business is at
least the same if not slightly better than what was projected in April. Air
Products Q3 was highlighted by 8% volume growth and CEO Seifi Ghasemi
continued to express a high degree of confidence in deploying $8-10B of
capital into high return industrial gas assets over the next 3-4 years.
Venator: growth and stability in TiO2
We are initiating coverage of Venator with a Buy rating and a PT of $24, upside
of 20%. With Venator shares flat since its August 2nd IPO, valuation is
compelling at 5.6x ‘18E EBITDA, vs peers at 7.2x, and a 12% FCF, the highest
in group. As the 3rd largest producer of TiO2 with 11% of global capacity,
Venator is well positioned to benefit from the current TiO2 upcycle, a cycle we
believe will last for 2-3 years. In addition, with a TiO2 portfolio that is 50%
specialty (vs <10% for peers) we believe Venator will deliver more stable and
higher earnings growth over a cycle than its TiO2 peers. As Venator validates
this thesis, we believe its 22% valuation discount to peers will close.
Visit to Albemarle in Charlotte: confidence is high
Ourvisit to Charlotte found the Albemarle (ALB, +0.4%, Buy) management
team focused on execution and confident on delivering its '17 financial targets.
Our visit also included a tour of the company's Kings Mountain lithium
processing facility, the potential home of a Wave 2 resource investment early
next decade. Overall, the meeting increased our confidence in Albemarle,
meeting, if not beating, our 2H’17 and '18 Lithium and total company EBITDA
estimates. With increased confidence in the company's ability to deliver, if not
beat, numbers over the next 18 months and valuation an attractive 13.7x '18
EBITDA, we are raising our TP$2 to $130, upside potential of 13% , and
reiterate our Buy rating.
Hurricane Harvey shuts down over 50% of US ethylene capacity
Hurricane Harvey has had a significant impact on US Gulf Coast chemical
operations. Texas-based ethylene crackers are offline totaling 54% of US
ethylene capacity. Propylene has also been severely impacted owing to the
large number of refineries that have been taken down with 36% of US polymer
/ chemical grade propylene supply confirmed offline. IHS forecasts it will
several weeks before for US ethylene production reaches pre-hurricane levels
owing to the i) the complexity of ethylene crackers, ii) the availability of raw
materials, iii) logistical and supply chain issues, and iv) possible unit damage.
Valuations look reasonable, but macro weakness may limit upside
Today’s 16.8x fwd P/E multiple for US Chemicals (ex-ag) is 13% above the 10-
yr avg. of 14.9x. We view US Chemicals trading at a 10% discount to the S&P
500 vs. a 10-yr avg. of a 4% discount as unwarranted given structurally low US
ethane prices.
Distributed on: 06/09/2017 15:46:13 GMT
0bed7b6cf11c
6 September 2017
Chemicals/Commodity
Chemicals Scorecard
Page2 Deutsche Bank Securities Inc.
Table of Contents
Stock performance . 3
Current valuations .. 8
Forward company valuations ....... 19
Growth & profitability ....... 30
Leverage, liquidity & capital ......... 51
Valuation & Risks . 75
Top Picks .. 76
Eastman Chemical .......... 76
Valuation. 76
Risks ....... 77
Trinseo .... 78
Valuation. 78
Risks ....... 78
Ashland ... 80
Valuation. 80
Risks ....... 81
6 September 2017
Chemicals/Commodity
Chemicals Scorecard
Deutsche Bank Securities Inc. Page3
Stock performance
Figure 1: Ranking by August performance
15.
6%
12.
9%
10.
0%
9.6
%
7.0
%
4.0
%
3.8
%
3.7
%
2.3
%
2.1
%
1.2
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1.1
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0.9
%
0.8
%
0.6
%
0.6
%
0.4
%
0.3
%
0.2
%
0.1
%
0.0
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(0.
2%
)
(0.
5%
)
(1.
1%
)
(1.
2%
)
(2.
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(2.
2%
)
(2.
5%
)
(2.
6%
)
(4.
1%
)
(4.
8%
)
(5.
6%
)
(6.
3%
)
(30%)
(20%)
(10%)
0%
10%
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Source: Deutsche Bank, Factset; include dividends
Figure 2: Ranking by 3-month performance (June, 2017- August, 2017)
36
.4%
25
.5%.8%.0%.6%.6%.6%.7%.5%
9.1
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8.2
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6.8
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5.3
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5.1
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4.5
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4.4
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2.6
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0.6
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0.6
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0.3
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(1.
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)
(2.
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(6.
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(50%)
(30%)
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50%
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Source: Deutsche Bank, Factset; include dividends
6 September 2017
Chemicals/Commodity
Chemicals Scorecard
Page4 Deutsche Bank Securities Inc.
Figure 3: Ranking by 6-month performance (March, 2017- August, 2017)
54
.3%
50
.2%
37
.6%
21
.9%.2%.7%.2%.6%.1%.5%
9.8
%
9.3
%
8.7
%
8.1
%
8.1
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7.8
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7.8
%
5.9
%
5.0
%
4.8
%
4.6
%
3.9
%
2.7
%
2.2
%
1.4
%
1.2
%
0.0
%
(1.
9%
)
(2.
3%
)
(5.
9%
)
(7.
0%
)
(8.
1%
)
(8.
7%
)
(10
.0%
)
(80%)
(60%