Description

INGR would be a highly attractive private equity target and is a cheap way to gain direct exposure to the fast-growing plant-based protein market.

Ingredion Inc. (NYSE: INGR, www.ingredion.com):  Based in Westchester, Illinois, Ingredion Inc. (“Ingredion” or “INGR”) is a leading global ingredients solutions provider, which turns corn, tapioca, potatoes, grains, fruits and vegetables into value-added ingredients and biomaterials for the food (53% of sales), beverage (11%), animal nutrition (10%), brewing (7%) and other (19%) industries.  The company sells to over 18,000 customers in more than 60 industries worldwide. The enterprise value of the company is approximately $7.1 billion, inclusive of $1.8 billion of net debt. For 2019, management has forecasted operating cash flow of $610-660 million and EPS of $6.60-6.90, supporting capital expenditures, share repurchases and a current dividend yield of 3.1%.  Going forward, management has targeted mid-single digit operating income growth and high-single digit EPS growth. On 2020 numbers, I estimate valuation multiples of 7.0x EBITDA and 10.8x net income.

Simple thesis is as follows:

Cheap valuation and strong balance sheet.  At only ~7x forward EBITDA, with strong free cash flow generation and modest net debt of ~1.8x EBITDA, the company is leveraged well below capacity and could be a solid platform for growth.

The stock has declined from ~$146 in January 2008 to ~$76 at present (~48%), owing largely to rising corn prices and severe foreign exchange impacts, driving EBITDA ~10% lower over this time. The forward P/E multiple has contracted sharply from ~18x to ~11x as investor sentiment has soured.

Improving business mix.  Presently, approximately 50% of operating income is derived from each of (i) core ingredients and (ii) specialty ingredients.  Specialty ingredients, such as texturizers, specialty sweeteners and plant-based proteins, command high profit margins, and presently comprise only 30% of revenue, while core ingredients (basic starch products) comprise the remaining 70%.  The company’s strategy is to grow the specialty business mix, organically and via joint ventures/bolt-on acquisitions, and expand margins.

Engaged, new management.  Jim Zallie, the previous CEO of National Starch (acquired by INGR in October 2010), became CEO of Ingredion in January 2018 after the company’s long-time CEO retired.  Objectively, Zallie has begun an aggressive cost savings initiative that is expected to reduce total expenses by $125 million (COGS by $75 million, SG&A by $50 million) by 2021.  Subjectively, I like that Zallie has previously sold a company – it illustrates his willingness to think strategically.

Insider share purchase.  James Gray, the company’s CFO, personally purchased $78,000 of company stock in the open market as soon as the window opened following the company’s first quarter earnings release.  Gray is an experienced financial executive who, earlier in his career, spent ten years at Bain & Company leading strategic growth projects, prior to joining Pepsi, where he was CFO of that company’s Gatorade division.  Generally, I pay closest attention to financial executives’ open market share activity, and most particularly, purchases.

Potential for sale at a significant premium.  Ingredion’s under-leveraged balance sheet, strong free cash flow, diverse customer base, solid industry position and sharp management could make for an attractive target for the cash-rich private equity industry.  CEO Zallie has previously spoken of his desire to grow through acquisition - clearly that would be effectively impossible at current valuations, and an equity sponsor could facilitate such a strategy. It is also possible that large commodity players (i.e. ADM or Cargill) could be interested, regulators permitting.

Applying a conservative 6.0x EBITDA multiple for the core ingredients business and a 15x EBITDA multiple (similar to the valuation of Sensient, and a discount to Givaudan’s 20x) for the high-margin, faster growing specialty business would imply a blended 10.5x EBITDA multiple and share price of ~$125, over 60% above current market value, but still nearly 15% below the company’s market value in early 2018.

The primary risks to our investment are continued increases in raw material costs that had not been fully hedged or cannot be quickly passed through.  That said, I believe risk/reward is tilted in our favor.

Catalyst

- Sale of company to private equity or strategic buyer
- Revaluation on plant-based protein optimism
- Easing raw material conditions