Description

Recommendation

• Long SYENS with >40% upside to the SOTP and ~10% downside to consolidated P/E valuation

  • Stock currently sets up at close to a 30% discount to the SOTP valuation of its six business units using conservative multiples relative to peers and earnings assumptions through FY25E

  • Mid-teens downside assuming stock trades in-line with the low end of multiples for relevant chemicals peers on P/E (assume 10.0x P/E in-line with EMN / CE)

• The setup on the stock looks quite cheap and consensus figures for FY24-25 have started to bake in projected profitability reversion in SYENS’s core Specialty Polymers business over the last few months post 4Q earnings making the setup increasingly compelling

  • ~1/3 of SYENS earnings (its Consumer & Resources segment) have already seen material declines for several quarters and will inflect cyclically in 2H24 

Situation Overview

• SYENS was spun off from Solvay as the SpecialtyCo in Dec-23 following a strategic review that commenced in early 2022

• The spin was intended to separate Solvay’s mature and high-cash-flow soda ash assets (the original Solvay commodity chemicals business) from its higher-growth, higher-capital-intensity assets generally with more differentiated, downstream exposure

• Solvay had historically grown its specialty chemicals business through a series of acquisitions including the acquisition of Cytec in 2015 and Rhodia in 2011

• Various assets that constitute SYENS today (e.g., Oil & Gas, Novecare, Technology Solutions) have historically received meaningful sponsor interest but the company had been unwilling to sell primarily due to value expectations

• Both Solvay entities continue to have ~30% share ownership by Solvac, the Belgian holding controlled by the descendants of Ernest Solvay

  • While the family is understood to have strong emotional ties to the original soda ash business (now part of RemainCo) and the specialty polymers business (now part of SYENS), the separation may be a catalyst for further portfolio actions at SYENS, particularly in the context of the lack of operational overlap and differences in quality across SYENS portfolio

• Following the Dec-23 spin, SYENS stock has underperformed chemicals peers due to increased concerns around end market weakness and the company’s lack of guidance for FY24 expected to be partially given at results on 3/12

• While parts of SYENS specialty polymers business (business represents ~40% of company revenue) appear to be over-earning, the remainder of SYENS business units either have significant embedded near-term growth (e.g., composite materials representing ~15-20% of company revenue) or are already at or near trough earnings level

  • Entire Consumer & Resources business which represents ~40% of company revenue has already seen 15-40% YoY cyclical revenue declines over the last 2-3 quarters

  • In addition, the business most at risk of price declines in SYENS specialty polymers business (PVDF) is also likely to exhibit the highest volume growth medium-term (significantly outgrowing the remainder of specialty polymers) and dampening he impact on total profit dollars earned)

Relative Performance Since Dec-21 Spin

Business Overview

• SYENS generated €7.2bn LTM revenue and €1.6bn LTM Adj EBITDA across a diversified portfolio of six chemicals assets that are reported in two segments

• Business broadly split into high-margin, high-multiple Materials business (~70% of SOTP TEV) which has highly differentiated product positioning, often operating in oligopolistic market structures and a lower-margin, lower-multiple Consumer & Resources business (~30% of SOTP TEV) where SYENS mostly provides specialty chemicals into end markets that have low cyclicality but often greater degree of competition or customer pricing power

• Materials (€4.1bn LTM revenue / >30% EBITDA margins)

• Materials business split into two assets that generally do not operate with much overlap 

• Specialty Polymers ($3.1bn LTM revenue / 30-35% EBITDA margins)

  • Business produces broad range of polymers that are used primarily in automotive, aerospace & electronics applications

  • Portfolio is differentiated relative to other polymers peers (see chart below) with ~30% truly differentiated through their performance criteria making them usable in environments requiring high durability or resistance (applications in hot section of auto or aero engines, medical-grade implantables requiring high material integrity e.g. PEEK polymers)

• SYENS does not break out revenues or margin associated with each polymer type but generally margins run in the 20-50% range with revenues tied to certain more cyclical end markets (automotive represents ~35% of total business)

• Main diligence concern for the business relates to downside risk to the medium-term earnings trajectory given recent net price taking success SYENS has had across its entire portfolio but most notably in Specialty Polymers

  • Consolidated EBITDA improved by ~€600mm from ~€1.2bn to ~€1.8bn between FY21 and FY22 almost exclusively driven by “Net Pricing” impact as SYENS aggressively priced up its portfolio in post-COVID supply tightness

    • ~€370mm of consolidated net pricing impact relates to the Materials business alone

    • SYENS realized an additional €217mm net pricing benefit for its Materials EBITDA in 1H23 relative to 1H22

  • While a certain subset of its polymers (particularly the ~30% of high-performance polymers noted above) have historically exhibited ability to retain price (which is also evidence by recent Victrex results which is a niche player in these applications and has not had to give back price), a significant portion of SYENS remaining polymer portfolio is likely to experience some level of medium-term price reversion that will drive Materials EBITDA margins lower

• Most end markets across SYENS Specialty Polymers business are mature, GDP+ type end markets

  • SYENS recent and projected above-average growth (embedded in its 5-8% rev CAGR through FY2) in this business primarily relates to a particular polymer grade—PVDF—that represents €500-600mm in revenue by expert estimates or ~17-20% of Specialty Polymers total)

  • PVDF has legacy end applications in mature markets like coatings & wire / cable materials but is also key substrate used in separators for lithium-ion batteries as dominant technology for EVs, a market that has grown mid- to high-teens

  • Significant capacity additions have either been made or announced by SYENS and its main peers Arkema & Kureha with SYENS’s growth focused on the higher-end version of PVDF (“suspension-grade PDVF”) almost exclusively used in EV batteries

    • SYENS is building a $1bn plant in the US capable of serving 5mm batteries to start up in 2026

    • Competitors mostly added capacity focused on “emulsion-grade PDVF” in more legacy industrial end uses

    • The company uses this differentiation as main reason for why Arkema reported mid-teens price declines in its PVDF business in the last few quarters already SYENS held up better until last quarter when the 

    • There has also been increased Asian competition in the provision of PVDF to Chinese battery manufacturers (such as CATL) directly which could pressure local pricing 

  • SYENS’s PVDF business historically generated 25-30% EBITDA margins but given recent market tightness formers noted that margins are likely close to 40% with the general expectation for pricing to come down notably (~10% price reductions in PVDF would not be unheard of) that should push PVDF margins closer to low- to mid-30s

  • Against the backdrop of reversionary pricing the business should continue to exhibit >10% volume growth near-term in a market that remains near balanced levels and will likely require the planned capacity additions in the next few years to remain balanced

• On my illustrative math (see table below), the noted price declines in PVDF against the backdrop of >10% volume growth should drive the overall Specialty Polymers margin down by ~150-200 bps by FY25E

• Composite Materials ($1.0bn FY22 revenue / 22-24% EBITDA margins)

  • This business provides composites primarily to the commercial aerospace (~60%) and defense customers (~25%) with significantly exposure to Boeing (>$1mm shipset content on B777x and B787, respectively)

  • SYENS acquired this business through the 2015 Cytec acquisition 

    • SYENS paid ~14.7x EBITDA for Cytec whose portfolio at the time also included more industrials focused businesses and a mining reagents business that is now reported as Technology Solutions in SYENS Consumer & Resources segment

  • Composite Materials is the clear #3 player in the composites market after HXL and Toray which both have more diversified exposure across AIR and BA

    • HXL through the 1996 acquisition of Hercules Composites has the strongest alignment to AIR

    • Beyond commercial exposure, the F-35 is one of SYENS major defense projects; supplies more than 50 products to the aircraft

      • Defense accounts for ~35% of Composite Materials 

      • LMT has recently announced delays in F-35 deliveries in FY24 due to issues with its TR-3

  • Unlike its competitors, SYENS is the only composites player without upstream integration into carbon fiber as key raw material input for composites

    • This is the key driver for the historically large margin differences to HXL’s Composites (~500 bps higher margins prior to COVID at ~27-28% vs Cytec in the low-20s)

    • The industrial positioning of Composite Materials has become increasingly challenged due to Toray’s decision to integrate upstream carbon fiber assets into downstream composites; Toray has historically supplied Composite Materials with carbon fiber but is increasingly a competitor in downstream applications putting this fiber supply at potential risk

  • General take-away from diligence to date is that none of the composites players have particularly strong pricing power relative to their large aircraft OEM customers and that it has often been a challenge to keep up with inflation

  • OEMs have been pushing the composites industry away from a very bespoke model of product supply towards a more standardized business model with standardized materials grades and manufacturing processes which should facilitate supplier substitutability and further cap any remaining pricing ability

  • As a result, I do not see much margin upside beyond historical levels of 20-25% near-term; SYENS business should easily grow HSD to low teens near-term as key Boeing platforms ramp up their build rates further

• Consumer & Resources (€3.7bn LTM revenue / ~20% EBITDA margins)

• Consumer & Resources is an even more diversified collection of generally lower-margin, lower-multiple chemicals assets that (unlike the Materials segment) have already reported significant (15-40% YoY revenue) declines over the last 2-3 quarters

• Novecare ($1.5bn LTM revenue / 15-20% EBITDA margins)

  • Novecare represents just under half of Consumer & Resources and provides various liquid polymers & surfactants to four core end markets (HPC, agrochemicals, coatings, general industrial)

  • Most of Novecare was acquired through the €3.4bn 2012 Rhodia acquisition

    • Solvay paid ~6.3x EBITDA for this business but has since divested some of its more commoditized assets and separated the more cyclical Oil & Gas business into its own reporting unit (see below) leaving the remaining Novecare portfolio tied to generally low-cyclicality end markets

  • Novecare contracts generally include commodity price pass-through provisions which has led to significantly declines in reported revenues as key raw materials have declined over the last few quarters

    • Price declines alone do not typically impact Novecare unit margins materially but most end markets (especially HPC & industrial) have experienced destocking trends that should come to an end as Novecare customers generally do not stock more than 12-18 months

• Technology Solutions (~€700mm LTM revenue / ~25% EBITDA margins)

  • Business was part of the Cytec portfolio and consists of (i) higher-margin mining reagents business (~75% of TS revenue) that supplies chemicals used in the extraction of copper and alumina ore—this is a high-margin business (~25% EBITDA margins) that provides the market leading mining extraction technology 

    • This business has strong lock-in effects with producing mines that rarely switch their reagent suppliers when operational 

    • SYENS appears to have significant share in new business wins with recent mine openings as their product is generally seen as the most effective solution in the market (though lower-priced Chinese supply has gained some share)

    • While tied to commodity cycles, producing mines do not typically shut production even in low commodity price environments given the prohibitive cost—this has lent some stability to the reagent business even in broader commodity cycles

  • TS further consists of (ii) an even higher-margin business that supplies phosphorous gases to agricultural and electronics applications in niche applications

  • TS is the best part of the Consumer & Resources portfolio with 25-30% EBITDA margins, dominant market shares, differentiated products and likely a ~10x business

• Aroma Performance (~€400mm LTM revenue / ~18% EBITDA margins)

  • Aroma Performance is one of Top 2 global suppliers of synthetic & natural-label vanillin

  • Vanillin is a global oligopoly historically with two dominant players—Solvay & Jianxing (both ~40% market share) and provides vanillin to acyclical, secularly growing end markets (F&B, pharma and fragrance)

  • The historical vanillin market structure was significantly disrupted through the 2021 decision by Indian player Camlin to integrate its (previously unintegrated) upstream capacity in phenol (key raw material in vanillin production) into its own downstream vanillin production

    • Camlin’s expanded downstream in the context of above-average vanillin demand growth during COVID as many consumers grew consumption of F&B products (particularly sweets) above long-term trends, creating a tight vanillin market 

    • The expansion effectively represents ~20% of additional capacity addition that came online just as vanillin demand growth reverted back to long-term trend levels of >5% growth, effectively leaving the current market with 15-20% overcapacity

    • Global vanillin prices have already collapsed by a factor of 2.5x from ~$25/kg to ~$10/kg as a result and appear to have found a floor recently

  • Beyond market structure challenges, SYENS was also hit by significant price escalation in European natural gas (~40% of SYENS vanillin capacity) 

    • This capacity still represents the high-cost producer in the oversupplied vanillin market

    • While secular growth drivers remain in-tact with market growth of 5-10%, the S/D balance will likely take 3-4 years to restore equilibrium and ~40% of SYENS capacity looks uneconomical until then

    • Likely best option would be for SYENS to curtail French capacity for some time to sit out this expected demand improvement over time

  • Ultimately, the Aroma Performance business is exposed to an attractive end market demand & structure and has historically generated mid-teens EBITDA margins with assets valued in the ~5-7x EBITDA context

• Oil & Gas (~€500mm LTM revenue / ~10-15% EBITDA margins)

  • The Oil & Gas business was carved out of Novecare and combined with some smaller TS assets in an effort to make these other business units more stable and attractive

  • Solvay had put this business up for sale several times in the past few years with several formers noting being involved in sponsor processes on the buyside here

  • Ultimately, a successful transaction appears to have stalled due to the board’s price expectations vs received offers

    • Solvay paid $1bn for this asset through the acquisition

  • General expectation by some of the formers that know the business well is that it would be hard to see a > €300mm value outcome here but that the board needs to get there on price

  • It is hard to see how this business stays with the overall portfolio medium-term given scale, lack of attractive fundamentals but it is also ultimately not a major needle mover

Catalyst

- Greater earnings certainty for standalone spinco (upcoming 1Q results)

- Inflection in Consumer & Resources volumes

- PFAS liability resolution

- Further divestments of businesses