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Initial Analyses Point to Significant Value Growth for DowDuPont
Posted on September 21st, 2017 by Nigel Davis in Chemicals Industry News and Analysis
For the time being DowDuPont is a “diversified chemical giant”, an “industry behemoth”. But the merger of the two most iconic names in the US chemical industry has been designed to create three leaner and more focused enterprises.
The potential for individual enterprise value creation is significantly driven by stronger growth and by stricter cost containment.
Kevin McCarthy at Vertical Research Partners last week published a first ‘deep dive’ on the combined group and the prospects for the three companies that are expected to result from the merger.
He calculates a three-year earnings per share (EPS) compound annual growth rate (CAGR) for DowDuPont of 11% driven by cost-cutting, new capacities, and a re-capitalized balance sheet.
Significantly, this is 400 basis points higher than the 7.2% average growth rate for the 16 chemical stocks the analyst covers.
The productivity gains reside largely within Dow – the new materials company that is likely to emerge in about 18 months from the combined, mainly upstream, assets of the group.
Dow is also bringing on-stream new production plants in Texas and at the giant joint venture with Aramco in Saudi Arabia. These new facilities increasingly are likely to give earnings a lift as optimum production capacity is reached – notwithstanding a weakening of ethylene/polyethylene (PE) returns in what is expected to be an over-supplied market.
Dow and DuPont have been waiting for two years to get their merger done and the reduced draw on cash over the period leaves the new company with only 1.0 times estimated DowDuPont 2018 earnings before interest, tax, depreciation, and amortization (EBITDA). This, according to McCarthy, gives DowDuPont room to recapitalize the balance sheet while preserving investment grade ratings for the three new entities.
“What is more, shareholder value creation could outpace earnings growth in the event that an (eventual) increase in interest rates alleviates pressure on DowDuPont’s under-funded pension plan,” he adds.
The outlook is strongly positive as the three DowDuPont committees set up to recommend the structure of the spin-offs gets further into their work. The committee’s recommendations are expected before the year-end. Pro forma financials for DowDuPont are expected on 15 November.
The company’s market capitalization is $152bn. It has an enterprise value of $175bn. Sales of $73bn make it much bigger than current industry leader by sales BASF. The chart, using Vertical Research Partners, ICIS and individual company data, shows how Dow DuPont and the three proposed spin-off companies would stand in the global rankings alongside the other established and planned merged chemical and agrochemical companies.
The new Dow will be a focused materials company comprising the larger part of the former Dow Chemical and upstream assets from DuPont. The materials science segment of DowDuPont will account for about 65% of estimated 2018 DowDuPont sales and earnings, and on a value basis 53% of the total, according to the analysts. Sales for the materials company will be weighted more strongly towards Asia Pacific and Latin America than in Dow Chemical.
The analysts have built a model which suggests that, at the greatest, between $7bn and $8bn of value could be unlocked if the DowDuPont portfolio were split differently between the materials and specialties companies.
What analysis like this cannot do, however, is weigh the impact on growth rates for both companies of a different structural alignment and the performance of the materials company (Dow) with a modified portfolio with fewer higher margin and less cyclical assets.
The advisory committee’s recommendations are awaited with keen interest and will be the focus of debate about the new company in its first months.
“With the merger now complete, our focus is on finalizing the organizational structures that will be the foundations of these three intended strong companies and capturing the synergies to unlock value,” said DowDuPont CEO ED Breen on 1 September.
“With a clear focus, market visibility, and more productive R&D, each intended company will be equipped to compete successfully as an industry leader.”
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Insights Editor, ICIS
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