Description

Koppers Holdings Inc. (NYSE: KOP)

Business Summary

Koppers Holdings Inc. (“KOP” or the “Company”) is an integrated global provider of carbon compounds, chemicals and treated wood products and services.  The Company’s products and services are used in a variety of niche applications in a diverse range of end-markets, including the aluminum, railroad, specialty chemical, utility, rubber, concrete, steel, residential lumber and agriculture industries.

Koppers is not a new business but has never before been written up on VIC. It’s an old school biz that is undergoing a dramatic rebirth/change thanks to newly diversified business lines and a new management team that has come in to delever, reorganize, pay down debt and take no prisoners. Normally in highly levered situations you end up paying up meaningfully in terms of multiple today but grow into an attractive rate over time. We believe @ 7.5x ebitda today you are not overpaying on a multiple today, still get the FCF and arguably a nice kicker if their chemical biz tied to housing outperfoms and could lead to a double in the stock.

KOP stock sold off due to the market viewing it as an overlevered steel/aluminum play that is tied to oil. When the new CEO took over he slashed the dividend, warned about potential covenant risks and guidance was slashed..crushing the stock and creating our current opportunity (and one management eventually took advantage of as well by buying stock in the open market).

KOP operates in three principal business segments: Carbon Materials and Chemicals (CMC), Railroad and Utility Products and Services (RUPS), and Performance Chemicals (PC).

Carbon Materials & Chemicals: The Company’s CMC unit processes coal tar (coking coal derivative) into a variety of products, including carbon pitch, creosote, carbon black feedstock, naphthalene and phthalic anhydride, which are intermediate materials necessary in the production of aluminum, the pressure treatment of wood, the production of carbon black for the rubber industry, the production of high-strength concrete, and the production of plasticizers and specialty chemicals, respectively. The majority of the creosote KOP produces in North America is sold internally to KOP’s RUPS business for treating railroad crossties.

Railroad & Utility Products: The Company’s RUPS business sells treated and untreated wood products (rail crossties), rail joint bars and services primarily to the railroad markets in the United States and Canada and the utility market in Australia.

Performance Chemicals: KOP’s PC business sells preservatives for residential and agricultural treated lumber that includes decking and fencing. This business supplies nine of the ten largest lumber treating companies in the U.S. and three of the four largest lumber treating companies in Canada.

Note: PF 2014 revenue/EBITDA based on Q4 2014 presentation materials and our estimates.

Investment Summary

New CEO shifting away from crappy CMC business unit:

• KOP has traditionally focused on its Carbon Materials and Chemicals business, a cyclical segment that has historically averaged +60% of total Company sales and 60-70% of EBITDA.  CMC EBITDA peaked at +$140mm in 2008, and fell to <$50mm in 2014 (sub $5mm in Q4 2014).  We believe this will do <$20mm in 2015.

• CMC sells products that compete with petroleum derivative products.  As the price of oil has fallen, competitive products and pricing benchmarks have fallen in kind.  Subsequently, organic Q4 sales were down 20% and EBITDA declined by 75% as spreads contracted.  Due to secular headwinds in the aluminum industry (another key CMC end market), and significant acquisitions in KOP’s other two segments, we expect CMC to contribute 10-20% of total EBITDA over the next few years.

• Walt Turner, the former CEO, joined the Company in 1969 and was effectively a lifer at KOP.  He cut his teeth in the CMC segment and was a strong advocate for that business unit.  Over the years, created a sprawling monstrosity of a division across multiple geographies.  This has led to massive inefficiencies and overcapacity (more on this later).

• Turner was replaced in Q4 2014 by Leroy Ball, who was brought into the Company as CFO in 2010.  We have spoken at length with Ball.  He is segment-agnostic with no hidden motives or segment loyalties, and simply put his goal is to allocate capital where returns are highest.  This is a critical deviation from his predecessor.

Targeted debt paydown with a focus on non-Chemical segments

• KOP took on debt to complete an acquisition just as the oil market cracked.  As such, the Company turned into a levered equity overnight and KOP’s share price suffered as investors took stock of the carnage.  Since November 2014, the Company’s share price has fallen from the ~$35.00-$40.00 range to $20-$25.00 per share.  This fall is due in large part to difficulties in the Carbon Materials and Chemicals business as well as concerns over leverage levels, which currently stands in the 5-6x PF 2014 EBITDA (7x 2014 stated EBITDA of $116 million).  The Company has stopped paying dividends as it seeks to conserve cash and delever.

• KOP completed a $460mm acquisition in mid-2014 (acquired Performance Chemicals division), which will dilute the impact of CMC (or the lack thereof) going forward.  We expect this to be more pronounced in 2015 as KOP realizes a full year including the acquisition and the investor base gets a better picture for the Company’s divisions.  KOP financed the transaction (completed in the 7-7.5x range) with a significant amount of secured debt.  We note the Company is at risk of breaching its senior debt maintenance covenants in 2015, however this risk has dissipated as performance has held up well through Q1 2015.  

• In the new CEO’s (Ball)  first earnings call at year end 2014, KOP put out guidance with a goal of achieving $170mm of EBITDA in 2015 (vs. $116mm in 2014A) and is targeting $200-$250mm of debt paydown through 2016.  This would put KOP leverage at ~3x EBITDA.  Ball, the new CEO, acquired 10,000 shares in early March 2015.

• This reads quite compelling, however in talking to the sell side we think that KOP investors were burned previously on lofty projections from management.  This was done when Ball was the CFO, and although the prior CEO was leading the charge, people feel Ball essentially blessed the numbers.  This is a bit unfair, in our view, and every conversation we have had with management seems to show that the new CFO is on point, and Leroy views this as his chance to shine as his first role at the helm.

Significant potential in the Railroad & Utility Products business & Performance Chemicals

• According to management and industry analysts, there are solid trends in KOP’s Railroad and Utility Products and Services business unit, which has been hampered over the past year by bad weather and competing demand for wood from the oil and gas industry (primarily rig platforms).  We anticipate this to be a bigger part of the KOPs story going forward as railroads are forced to restock their inventory of railroad crossties, with a particularly good year in 2015.

• The Performance Chemicals business unit is also performing well, as we are entering a sweet spot for existing housing sales and consumer-driven home remodeling (including deck/porch refurbishing).

Recent events are painting a more positive picture for the Company

Several notable events have occurred just recently  that are incrementally positive for KOP.  These include:

• The ortho xylene (“OX”) spot price, which is a determinant in the pricing for phthalic anhydride, has increased to 46 cents since bottoming at 36 cents (note: avg. 2014 price was mid $0.50’s and reached +$0.70 in 2014).  We do not have KOP volume/price specifics, but according to management on an annual basis every 1 cent price increase equates to $1mm of EBITDA.  A major player in the U.S. which represents approximately 30% of capacity is exiting the business which we feel should help increase EBITDA. Thus over a year, the increase from $0.36 to $0.46 would imply an additional $10mm in CMC.  We think management may have assumed a marginal increase in OX prices in their own assumptions for 2015, however a sustained price in the mid-40s should be incrementally positive for 2015 (note: we are not suggesting CMC will experience a $10mm windfall, but note that upward trend in OX prices is good for business.

• KOP reported new information relating to a JV in China with Nippon Steel.  The Company has basically had a factory up and running, however Nippon has not stepped up to buy product yet as part of the JV.  According to a recent press release, Nippon will now pay KOP $30mm (essentially an act of good faith for the losses incurred to date) and KOP will achieve a minimum EBITDA of $9mm out of the entity once it is fully up and running.  We estimate this will occur in the back half of 2016.  Based on our estimate, the JV was costing $4-5mm of EBITDA, so that $9mm positive equates to a ~$14mm swing.  Moreover, this $9mm is a minimum annual number and will increase based on end product costs.  This achieved EBITDA is not as good a was originally intended when the contract was struck, however in our view the JV was all but written off by the investor community so it’s a big win for management.

We have assumed that of the $30mm paid by Nippon, $14mm will be used to repay KOP’s outstanding China loans with the rest covering additional costs incurred.  This debt paydown is a positive for covenant calculation, as there are outstanding letters of credit that flow into the leverage calcs. To show how little market pays attention: using a 6x multipole on the 14mm swing in ebitda plus the $14mm back in cash would have been worth about $5 a share..the day it was announced the stock traded lower. We spoke with management to see if we were missing anything and the exact words were “Nope, we are as perplexed as you are, this is unambiguously positive”

• Based on discussions with management, we understand that once the Company has further delivered through 2016, there remains a number of strategic objectives that will be undertaken in the CMC segment.  

This is essentially a complete rationalization of factories and facilities across Europe and Asia, which were admittedly overbuilt under the leadership of the previous CEO. We think this will deliver a run rate $60mm in savings at a cost of $60mm, with an anticipated payback of 2 years.  We show this below in our sum of the parts Blue Sky scenario and have moderated the costs/savings assumptions to remain conservative versus management.  Importantly, we think investors are ignoring this and management, while not certainly concealing this agenda, has not actively publicized it amidst the current deleveraging plans.  

• There are additional asset sales and hidden gems within CMC.  We expect the Company will continue to divest certain assets seek to repatriate capital stuck in underperforming entities.  For example, the Company has an $8mm loan sitting in a JV that it is seeking to call.  This has not been discussed at length with the investor community.

• Management continues to insist that it is reinventing itself under the new CEO, taking a hard line on the CMC unit and actively rationalizing capital deployment.  CMC end markets are steel/aluminum and rationalization here makes tremendous sense; the market still views this company as focused mostly on CMC when in reality it is far more tied now to rails and housing then to steel/aluminum.

KOP Summary Segment Performance & Evolution

As noted in the Executive Summary, KOP is migrating from dependence on CMC to its RUPS & Performance Chemicals units.  This is due in part to an August 2014 acquisition of the two business units from Osmose for $460mm. KOP acquired Osmose’s Wood Preservation Group and Railroad Services unit, which we think adds ~$60mm of total EBITDA to the Company.

For historical perspective, below we show the evolution of sales mix, as well as EBITDA margins and contribution.  

From the chart above (CMC revenue contribution & EBITDA contribution highlighted), we see that CMC peaked in 2008 with adjusted EBITDA in excess of $140mm and margins of +16%.  That stands in stark contrast to 2014, where EBITDA registered at $47mm and margins stood at <6%.   However, with acquisitions in the RUPS segment and the creation of the Performance Chemicals segment, KOP is much less dependent on CMC to succeed, and we believe it will contribute a much smaller % of the overall business in 2015 and 2016.  

Management Case

Below we show two key summary slides from management’s Q4 2014 earnings call.  

A big increase comes from the PC business, which as we’ve noted is new business line in 2014.  PC had 2014A sales of $123mm, and based on previous 8K filings the Osmose business did ~$400mm of total sales in 2013 (some of which goes to the RUPS business).  Stripping out ~$100mm in sales, we think that management may be assuming 10-15% growth in this business unit.  We are somewhat more conservative in our own modeling.  

RUPS is expected to benefit from having part of the Osmose acquisition in that division for the full year and from organic improvement in customer demand.  CMC, we have been somewhat more conservative in CMC versus management.  

We show the Company’s EBITDA bridge below, as well as a breakout from the individual business lines:

Sum of the Parts Analysis

We show our sum of the parts based on 2016E performance figures.  For comparative purposes, we include managements estimate for 2015E, as this illustrates our assumption for 2016E vs 2015E.  

We a few key points here:

RUPS

Our midpoint 2016 EBITDA assumption is in line with management’s estimate for 2015.  In addition, our 8.0-8.5x multiple is significantly below Stella Jones trading multiple of 12-13x EBITDA (key comp for the RUPS segment).  We have a downside RUPs case of $70mm, which is essentially back to 2013/2014 levels where we believe railroad purchasing was unsustainably low.

PC

We assume 2016 is in line with 2015 in our mid-case, with a 7x multiple (below what KOP paid to acquire the business).  Management has spoken strongly about the prospects for this segment, so our upside of $70mm is potentially conservative.

CM&C

We show a range up to $35mm, with a 5x multiple.  Arguably that multiple is low given where we are in the cycle.

In addition, in our Blue Sky scenario we add in $30mm of EBIDTA to CM&C as well as $70mm of additional costs.  This is based on a haircut to management commentary related to an eventual CM&C restructuring, which will occur once leverage is down to a more manageable level.  We do not believe this restructuring value is well understood by the market.

Given our assumed debt paydown, we arrive at a mid-level equity value of approximately $32.50 per share.  Our Blue Sky case yields an equity value of roughly $45.00 per share, implying nearly 100% upside.  Our downside case of $15.50 reflects lower multiples with less robust debt paydown and stagnant EBITDA performance.

We feel confident our low case scenario for CMC is way too low particularly when factoring in the cost cuts management has in mind, which we feel will be done once debt has been paid down to more manageable levels. Further the company discussed briefly on the last conference call there are other hidden gems here including various potential asset sales including $30mm related to factories which generate diminimus ebitda that other buyers have interest in for strategic purposes.

CM&C, post restructuring, contributes more value in our Blue Sky scenario, however in our other scenarios it comprises well under 20% of total consolidated EBITDA.  

Capitalization Table

We show an updated capital table below.

Business Overview

Carbon Materials & Chemicals

In the CMC business, KOP processes coal tar into a variety of products, including carbon pitch, creosote, carbon black feedstock, naphthalene and phthalic anhydride.  These products are the intermediate materials necessary in the production of aluminum, the pressure treatment of wood, the production of carbon black for the rubber industry, the production of high-strength concrete, and the production of plasticizers and specialty chemicals, respectively.  

Coal tar is the key raw ingredient here, and it is a by-product generated through the processing of coal into coke for use in steel and iron manufacturing. Coal tar distillation involves the conversion of coal tar into a variety of intermediate chemical products in processes beginning with distillation.

The availability of coal tar is linked to levels of metallurgical coke production, and as the global steel industry has reduced production of steel and metallurgical coke, the volumes of coal tar, a by-product of metallurgical coke production, have also been reduced. The Company’s ability to obtain coal tar (and the price at which coal tar is obtained) has a significant impact on the level of profitability of the CMC business. Many of KOP’s sales contracts include provisions that allow for price increases based on increases in the price of raw materials, which has allowed the Company to generally maintain margins in its core businesses. However, significant increases in raw material costs can result in margin dilution if only the increased cost of the raw material is passed on to the customer. Additionally, in certain regions such as China that have competing markets for coal tar, or in regions where the available supply of our products exceeds demand, the Company may not be able to recover raw material cost increases in the selling prices for our end products.

From coal tar, CMC makes:

• carbon pitch, a critical raw material used in the production of aluminum and steel (the Company believes that the CMC business line is the largest global supplier of carbon pitch to the aluminum industry)

• naphthalene, used for the production of phthalic anhydride and as a surfactant in the production of concrete;

• phthalic anhydride, used in the production of plasticizers, polyester resins and alkyd paints; and

• creosote, used in the treatment of wood or as a feedstock in the production of carbon black, respectively.

We show a historical breakdown of sales from CMC below.  Note that we do not have margins or volume information for this segment, and therefore rely on trends and current dynamics as it relates to profitability going forward.

Carbon Pitch

Carbon pitch is a critical raw material used in the production of aluminum and for the production of steel in electric arc furnaces. Approximately one ton of carbon pitch is required for every 10 tons of aluminum produced and there are currently no known viable substitutes for carbon pitch in the aluminum production process. Over 90% of CMC’s pitch is sold to the aluminum industry, typically under long-term contracts ranging from three to five years. Many of these long-term contracts have provisions for periodic pricing reviews. KOP has been a leading supplier of carbon pitch to the aluminum industry for over 20 years, and the Company believe we are the largest producer of carbon pitch for the aluminum industry. Competitive factors in the carbon pitch market include price, quality, service and security of supply. KOP believes that it has a competitive advantage based on a global presence and long-term raw material supply contracts.

In the United States, these supply contracts generally have terms ranging from two to 25 years, and most provide options for renewal. Pricing under these contracts is generally either formula-based, with adjustments on an annual or semi-annual basis, or fixed for the duration of the contract. The Company’s primary European supply contracts either have a remaining term of approximately five years or have a remaining term of five years and thereafter extend indefinitely unless terminated by one year advance notice. These contracts contain formula-based pricing, which is reviewed or adjusted on a monthly, quarterly or annual basis. The Company’s primary Australian supply contracts have terms ranging from five to ten years and contain formula-based pricing which is adjusted on an annual or semi-annual basis. Finally, in China, KOP has raw material contracts in place with each of its respective joint venture partners. These contracts are coterminous with the applicable joint venture arrangement and provide for formula-based pricing adjusted on a monthly or quarterly basis.

Naphthalene and Phthalic Anhydride

As shown in the diagrams on the previous pages, chemical oils are further processed to produce naphthalene, which KOP sells into the industrial sulfonate market for use as dispersants or in the concrete additive and gypsum board markets. Additional end-uses include oil field additives, agricultural emulsifiers, synthetic tanning agents and dyestuffs. In the United States, KOP also uses naphthalene as a feedstock in the manufacture of phthalic anhydride. The primary markets for phthalic anhydride are in the production of plasticizers, unsaturated polyester resins and alkyd resins. KOP utilizes internally produced naphthalene, which I believes gives the business a more stable supply and generally lower-cost feedstock for the production of phthalic anhydride compared to competitors.

We want to note here that price realizations and operating margins for phthalic anhydride, naphthalene and carbon black feedstock (described below) have historically fluctuated with the market price of crude oil, market prices for chemicals derived from crude oil, such as orthoxylene or market indices derived from crude oil.   We show a chart indicating this relationship further below.

Creosote and Carbon Black Feedstock

In the United States and Canada, creosote is used as a commercial wood treatment chemical to preserve railroad crossties and lumber, utility poles and piling. The majority of KOP’s domestically produced creosote is sold to its Railroad and Utility Products and Services business. In Australia, China and Europe, creosote is sold primarily into the carbon black market for use as a feedstock in the production of carbon black.  For reference, carbon black feedstock is an amorphous form and is a major component used in the production of tires, as well as the pigment paint and rubber industries.  

In Europe and China creosote is also sold to wood treaters. KOP’s wood treating plants in North America purchase substantially all of its creosote from the Company’s tar distillation plants. The Company’s believes that it is the only major competitor in this market that is integrated in this fashion. The remainder of KOP’s creosote is sold to railroads and other wood treaters.

Other Products

Other products include the sale of refined tars, benzole and specialty chemicals.

Sensitivity to Oil

From our conversations with the Company, the CMC business is highly susceptible to oil prices for its product margins.  As noted in the call notes in the Appendix, the Orthoxylene price is a key spot price to watch. According to management, a 1 cent move in that price hits gross margins by $1mm.  We have not been able to find this price quoted on Bloomberg or other websites, however the Company reports this sporadically on its investor calls.  Prices have averaged in the $.60s and $0.70s in the past few years, and the current price stands at $0.36 according to KOP management.  This has risen to $0.46 in July 2015, however with oil falling to the lower $50s over recent weeks we think OX could move in sympathy.

We show below an illustration of the Orthoxylene prices (based on quarterly management commentary where available) and oil prices.  We also show the relationship between margins for CMC.

Railroad and Utility Products and Services

Before diving into a description of the RUPS business line, we want to emphasize that a significant portion of this segment is a fairly stable replacement business.  Specifically, there are 600mm railroad crossties in the US, and each year ~20-25mm ties are replaced.  Over the past several quarters, as a result of high demand from the oil and gas industry and bad weather, wood prices have been rising and railroads have delayed maintenance purchases.  This has resulted in lower than normal tie inventory (KOP is down to 4.2mm ties vs. ~6mm historically).  As a result of lower oil prices and a slowdown in oil and gas drilling activity, industry analysts believe that 2015 should be a strong year for the industry.  

The Railroad and Utility Products and Services business (“RUPS”) sells treated and untreated wood products, rail joint bars and services primarily to the railroad markets in the United States and Canada and the utility market in Australia. This segment also produces concrete crossties, a complementary product to its wood treatment business, through a joint venture in the United States. The Company also operates a railroad services business that conducts engineering, design, repair and inspection services for railroad bridges, serving the same customer base as its railroad crossties business.

Railroad products and services include procuring and treating items such as crossties, switch ties and various types of lumber used for railroad bridges and crossings. Railroad products also include manufacturing and selling rail joint bars, which are steel bars used to join rails together for railroads. Utility products include transmission and distribution poles for electric and telephone utilities. The RUPS business operates 14 wood treating plants and one rail joint bar manufacturing facility located throughout the United States, Canada and Australia. KOP’s network of plants is strategically located near timber supplies to enable it to access raw materials and service customers effectively. In addition, the Company’s crosstie treating plants are typically adjacent to our railroad customers’ track lines.

The RUPS business manufactures its primary products and sells them directly to KOP customers through long-term contracts and purchase orders negotiated by the Company’ s regional sales personnel and coordinated through our marketing group at corporate headquarters.

Hardwoods, such as oak and other species, are the major raw materials in wood crossties. Hardwood prices, which account for more than 50 percent of a finished crosstie’s cost, fluctuate with the demand from other hardwood lumber markets, such as oak flooring, pallets and other specialty lumber products. From speaking with management, wood cross ties go for ~$30-$35/tie.

The Company has been impacted in its ability to acquire hardwood due to the demand for crane mats associated with the oil and gas industry. In addition, weather conditions can be a factor in the supply of raw material, as unusually wet or inclement conditions may make it difficult to harvest timber.  This has been the case over the past several quarters.

In the United States, hardwood lumber is procured from hundreds of small sawmills throughout the northeastern, midwestern and southern areas of the country. The crossties are shipped via rail car or trucked directly to one of KOP’s crosstie treating plants, all of which are on line with a major railroad. The crossties are either air-stacked for a period of six to nine months or artificially dried by a process called boultonizing. Once dried, the crossties are pressure treated with creosote, a product of the CMC business.

A substantial portion of the Company’s crossties are treated with borate, which is purchased from outside suppliers, in combination with creosote.  

KOP’s RUPS division is one of the largest supplier of railroad crossties in North America. There is one principal competitor, Stella-Jones Inc., and several smaller regional competitors in the North American market. Competitive factors in the railroad crosstie market include price, quality, location, service and security of supply. RUPS believes that it has a competitive advantage due to its national network of treating plants and direct access to major customers’ rail lines, which provide for security of supply and logistics advantages for our customers. The Company believes that its Australian utility pole business is the largest producer of utility poles for the electrical communications utilities in Australia.

The RUPS business’ largest customer base is the North American Class I railroad market, which buy approximately 74 percent of all crossties produced in the United States and Canada. KOP’s also has relationships with many of the ~550 short-line and regional rail lines. This also forms the customer base for the rail joint bar products.

The railroad crosstie market is a mature market with approximately 24 million replacement crossties (both wood and non-wood) purchased during 2014. KOPs currently supply all seven of the North American Class I railroads and have contracts with all of them.

Demand for railroad crossties may decline during winter months due to inclement weather conditions which make it difficult to install railroad crossties. As a result, operating results may vary from quarter to quarter depending on the severity of weather conditions and other variables affecting our products.

Utility poles are produced mainly from hardwoods of the eucalyptus species in Australia. Most of these poles are purchased from large timber owners and individual landowners and shipped to one of our pole-peeling facilities. In Australia, in addition to utility poles, we market smaller poles to the agricultural landscape and vineyard markets.

Performance Chemicals

This is a new division that was acquired from Osmose in mid-2014, so there aren’t full year financials yet.  This is a seasonal business, with Q2/Q3 delivering the highest margins, and as such the results for 2014 don’t accurately reflect the total sales/margin we expect going forward.

The Performance Chemicals business (“PC”) sells preservatives for residential and agricultural treated lumber that includes decking and fencing. This business supplies nine of the ten largest lumber treating companies in the U.S. and three of the four largest lumber treating companies in Canada. The primary products for this business are copper-based wood preservatives including micronized copper quaternary and micronized copper azole (“MicroPro”), alkaline copper quaternary, and chromated copper arsenate.

The products produced and sold by the PC business are sold primarily to wood treaters that use KOP’s products to produce treated lumber for decking, fencing, vineyards and various other applications. KOP has a research and development center located in Griffin, Georgia, with smaller research and development facilities located in the United Kingdom and New Zealand. Our PC business has been awarded patents on many of its products including MicroPro, which currently enjoys the leading market share in the North American residential treated lumber market

The Company believes that it is the largest global producer of wood preservation chemicals for use in treating lumber. KOP’s PC business has operations in the United States, Europe, Canada, Australia and New Zealand. Additionally, there are sales offices in several countries including Brazil and Chile, which the Company believes will facilitate its ability to grow its railroad crosstie business in Latin America.  Key competitors in wood preservation chemicals include Lonza Wood Protection and Viance Treated Wood Solutions.

We show a chart of existing home sales below, which the Company points to as a key driver for performance.

Excerpts from Osmose Acquisition Presentation (PC & RUPS)

Investment Thesis

With the 2014 Performance Chemicals acquisition and subsequent lackluster performance due to the oil selloff, KOP screens as a highly levered equity.

That being said, the investment thesis here is that the market has frankly overreacted to the pullback in CMC and is misunderstanding / overlooking the potential of RUPS/PC segments.  We do not anticipate a near-term return to profitability in the CMC division, however that is not needed to for the business to continue to delever and reinvent itself as an entity focused on the relatively stable maintenance business (RUPS) and a business that is largely dependent on existing home sales and consumer confidence (PC).  

A sum of the parts analysis demonstrates that assuming valuation multiples several turns below comps for RUPS, we are essentially getting the entire CMC business for free.  In the meantime, the Company is generating significant free cashflow.

There remains additional optionality here: the new CEO says everything is on the table, and he is taking a fresh look at how to restructure and optimize the three division. Besides for the solid free cash flow there are lots of other ways to win and hidden gems here including JV monetizations and restructurings, asset realignments, and asset sales.

Disclosures: may buy or sell at any time, do your own work etc.

Catalyst

Catalysts

• Dividend re-initiation once company adequately delevers (3x)

• Stock rerating based on market perception of business going forward (RUPS/PC business)

• Asset sales could accelerate delevering and further maneuver KOP away from the CMC division

• Oil price recovery will significantly boost CMC performance

Risks

• Equity offerings - we view this as unlikely given repeated statements from management that they don’t intend to raise equity at these levels;

• Environmental costs and legal proceedings create unexpected expenses

• Lower than expected ramp in crosstie restocking and purchasing

• CMC business requires additional capital and is a drag on overall enterprise