Description

Thesis

Spectrum Brands Holdings, Inc. (SPB or the company) is a diversified global branded consumer products and home essentials company that is going through a portfolio restructuring.

The portfolio restructuring will leave SPB a smaller garden and pet focused company with less leverage. Pro-forma for announced divestments, the company trades near 7x EBITDA 2022 (and near 6x 2023) while peers trade 8.5x to 14x, applying a 10x EBITDA multiple on a SOTP basis results in a $129 stock target, a 50% upside from current levels with two key near term catalysts (HHI asset sale closing and Home Appliances divestment) to facilitate the re-rating.

Management has been buying back stock and recently approved a new buyback plan. SPB expects to benefit from multiple arbitrage with a re-rating closer to 14-15x post-transactions, suggesting an optimistic blue skies scenario of $182 price target (+100%).

Company

SPB is a diversified global branded consumer products and home essentials company.  The company has three segments and several sub-segments: 

·         Home and Personal Care (“HPC”)

o   Home Appliances – to be spun off or listed separately

§  Small kitchen appliances including toaster ovens, coffeemakers, slow cookers, blenders, hand mixers, grills, food processors, juicers, toasters, irons, kettles, and breadmakers  

o   Personal Care

§  Hair dryers, flat irons and straighteners, rotary and foil electric shavers, personal groomers, mustache and beard trimmers, body groomers, nose and ear trimmers, women's shavers, haircut kits and intense pulsed light hair removal systems

·         Global Pet Care (“GPC”)

o   Companion Animal

§  Rawhide chews, dog and cat clean-up, training, health and grooming products, small animal food and care products, rawhide-free dog treats, and wet and dry pet food for dogs and cats

o   Aquatics

§  Consumer and commercial aquarium kits, stand-alone tanks; aquatics equipment such as filtration systems, heaters and pumps; and aquatics consumables such as fish food, water management and care

·         Home and Garden (“H&G”)

o   Household

§  Household pest control solutions such as spider and scorpion killers; ant and roach killers; flying insect killers; insect foggers; wasp and hornet killers; and bedbug, flea and tick control products

o   Controls

§  Outdoor insect and weed control solutions, and animal repellents such as aerosols, granules, and ready-to-use sprays or hose-end ready-to-sprays

o   Repellents

§  Personal use pesticides and insect repellent products, including aerosols, lotions, pump sprays and wipes, yard sprays and citronella candles

o   Cleaning                          

§  Household surface cleaning, maintenance, and restoration products, including bottled liquids, mops, wipes, and markers.     

And lists the following as discontinued operations:

·         Hardware and Home Improvement ("HHI") - Sold

EBITDA margins across segments:

Situation

On 9/8/21, SPB entered into an agreement to sell HHI to ASSA ABLOY AB (ASSA) for $4.2bn, with after tax proceeds of $3.5bn exhausting the company’s NOLs. The transaction is expected to close by year end and SPB targets 2.5x gross leverage post transaction or 2.0 – 2.5x net leverage. The de-levering nature of this transaction would be an improvement from current net leverage of 4.8x. The transaction values the segment at 14x 2021 adjusted EBITDA, a very nice multiple expansion from SPG’s 2012 acquisition of HHI from Stanley Black & Decker for 7.5x EBITDA of $1.4bn.

On 2/4/22 SPB announced the acquisition of Tristar Products’ appliance and cookware business division which will be merged into Spectrum’s existing appliance unit, a sub-segment of HPC, and then spun off or listed separately. The appliance and cookware business was acquired for $325MM (0.6x and 5.2x CY21 sales and EBITDA). Commentary from recent earnings and conference calls suggest an IPO is more likely. The acquisition will be financed by a $500 million dollar term loan and adds selling capability, diversity and scale to the appliance segment to allow a separation.

The portfolio restructuring will turn SPB into a faster growing, higher margin, pure play Global Pet Care and Home & Garden company and create meaningful shareholder value with this transformation.

Valuation

Current implied valuation.

SOTP valuation.

Valuation assumes a $325MM purchase price for Tristar plus plus 50% of earn outs achieved less capitalized value of synergies. Direct comps for HPC trade at ~9.5x EBITDA (8.5-14x range); for H&G (2 names) trade at ~11.5x EBITDA (9.5-12.5x range) but discounted here due to recent inflation and supply chain headwinds; and for Pet, deal multiples (4 comps) were high-teens EBITDA (9.5 -25x range).

Management’s View

David M. Maura, Executive Chairman and Chief Executive Officer, Q1 2022 Earnings Call

“I think if people really look at our business today, the holding company today is trading at about 7 times EBITDA, pro forma the HHI business. And that's why I've been aggressive in buying back our shares because I do believe once appliances is spun off, our multiple can be re-rated much more in line with where I believe a Home & Garden and Pet business of our caliber should trade. So that's what I'm trying to do to create wealth for our stockholders.”

In Q1’21, SPB we repurchased approximately 1.1 million shares of stock for $110 million and concluded the prior quarter's $150 million buyback plan as approved by the Board of Directors. After the conclusion of the previous buyback plan, the company authorized the repurchase of another $150 million of stock and as SPB gets closer to the HHI transaction closure of the HHI transaction, SPB accelerated repurchase.

The company has been clear that it expects to benefit from multiple arbitrage with a re-rating closer to 14-15x post-transactions, suggesting a $182 price target.

Financial Performance

Recent performance has been lumpy to say the least. Q1’22 took a larger margin hit than expected due to a difficult pre-inflationary comparison. Weak EBITDA for the quarter increased net leverage to 4.8x from 3.5x as EBITDA declined with a draw against the revolver to support higher working capital needs reflecting supply chain inefficiencies.

A key risk for the company is inflation and it showed in the latest quarter. Elevated costs in inputs and freight will remain headwinds in Q2’22. The company recently increased its inflation outlook for FYE22 to $310-330 million, from $230-250 million last quarter. The company expects pricing increases to improve its margins so that F4Q is a step-up improvement. Such price increases allowed SPB affirm its FYE22 guidance for sales up mid- to high single digits and adjusted EBITDA up low single digits.

While GPC sales remain strong for the quarter, H&G slowed due to supply chain disruptions and transportation shortages that pushed some deliveries beyond the quarter. H&G demands seem to be softening overall despite the company expecting a record year for the segment.

Risks

Inflation, supply chain issues and a downturn in housing.

Catalyst

HHI asset sale closing and Home Appliances divestment