Description

With the stock trading at €33.50 following disappointing earnings guidance I feel now is a good time to revisit Tessenderlo (TESB BB). I am going to provide a brief overview of the segments and more importantly discuss what has changed since then and where I believe the business is going. The bottom line is the business should generate ~€3 of free cash flow per share in 2018. In addition, it has significant underutilized assets that have been built in the past two years and which should generate another €0.80 per share. Lastly, the company has a fortress balance sheet with ~€150mm of excess cash (€3.50/share). The business is run by Luc Tack, a tremendous owner-operator who controls >40% of the stock and who is a long term investor. Taken together I see upside to ~€50+ in the next 2 years.

The company has 42mm shares outstanding and at €33.50 the cap is €1.4bn. Debt is €250m and cash €200m for a total enterprise value of €1.45bn. Luc Tack both personally and through Picanol (PIC BB – a business he owns >90% of) owns ~41% of the shares outstanding.

The business has three segments – Agro (36% of revenue, 60% of EBITDA), Bio-valorization (31% of revenue, 15% of EBITDA), Industrial solutions (30% of revenue/21% of EBITDA) and Other which is their contract engineering business (less than 5% of revenue/EBITDA).

Agro:

The agro business can be broken into 3 division – Kerley and Sulphate of Potash which comprise crop nutrition and Novasource which is crop protection. The segment reported €600m of revenues and €114.4m of EBITDA in CY17. This represented 6.1% growth at CC and a -1.8% decline in EBITDA. I estimate Kerley generates ~€400m of revenue, SOP ~€100m and Novasource ~€50m. Pretax return on assets is 24%.

Kerley is the most significant business and Tessenderlo produces and sells sulfur based liquid fertilizers under the brand name Thio-Sul (nitrogen+sulfur) and KTS (potassium+sulfur). Tessenderlo is backward integrated into refineries such that they receive the sulfur for minimal cost, is the industry leader (market share >50%) and has extensive distribution and logistics to ensure availability to farmers.

SOP is applied to cash crops such as flowers, fruits, vegetable and nuts (almonds) and has low salinity and chloride content which those crops require. The market is ~6mt globally and Tessenderlo through their production in Ham, Belgium is ~400kt-500kt. The main competitors are K+S and Compass Minerals and prices are much more stable than granular potash (SOP in the US is ~$615/ton v MOP of ~$280-300/ton).

Novasource is a small crop protection business whereby the company buys products that are no longer wanted by the big producers like DWDP or FMC and where there are limited alternatives.

The important point in this segment is that the business has latent earnings power through significant investments made in expanding production the last 3 years:

• Startup of new ATS plant in 4Q/17 in East Dubuque, Iowa adjacent to the Rentech refinery. The plant should have ~150kt of capacity and prices for ATS are ~$250/ton. The plant should ramp to full capacity over the next 2-3 years and conservatively add ~€8-12mm of EBITDA as well as reduce logistics costs for the company.

• Startup of new ATS plant in 4Q/17 in Rouen, France. The plant should have ~200kt of capacity and prices and assuming similar prices in Europe €12-15mm of EBITDA in addition to lower logistics costs as Tessenderlo was previously supplying Europe from their US operations.          

• The company built a KTS plant in Hanford, CA which was opened in late 2016 and has slowly been ramping up. At full run-rate it should add an incremental ~€10mm of EBITDA over 2017.

Finally the decline in EBITDA in 2018 was due to a couple of factors, namely startup costs of ~3.3m, lower margins as SOP prices declined at the beginning of the year and only started tick back up in 4Q (while volumes were strong) and a significant investment in SG&A/agronomists to ramp up for the new capacities.

Bio-valorization:

The BV business consists of two segments roughly evenly split – Akiolis and Gelatins. The segment reported €517m of revenues and €29 of EBITDA in CY17. This represented 6.1% growth at CC and a -8% decline in EBITDA. Pretax return on assets is 8%.

Akiolis is a French business where the company collects and processes animal by-products from slaughterhouses. The company then converts the protein and fat into various end markets. Gelatins is one of the key by-products and can take up to 6 months to produce given the washing, extraction and purification required by the food (ie gummy bears), drug (capsules) and nutraceuticals (collagen) industry.

The business historically earned €50-60mm in EBITDA but was underinvested. Tessenderlo is currently investing significant “maintenance capx” dollars that are running through the income statement (they call out €15mm) which is the reason earnings are flat.

Industrial Solutions:

This business consists of plastic piping systems, water treatment and ATS for mining. The segment reported €495m of revenues and €40m of EBITDA in CY17. This represented 5.1% growth at CC and a -11% decline in EBITDA. Pretax return on assets is 18%.

Plastic piping systems is a manufacturer and distributor of extrusion pipes and thermo-molded fittings in the Benelux, UK, France and select Central European countries. The key driver is construction and raw material prices (ie caustic soda) and in 2017 caustic soda prices increased due to plant shutdowns and Tessenderlo had a lag in passing through their price increases. It’s a capital light business with good market share and the company is focused on improving customer service which should provide for less price elasticity and greater volume (eg. Delivering pipes to the job site rather than having customers pick it up at the warehouse).

Water treatment is a business where they produce ferric chloride coagulant used for waste water and drinking water. One of the key intermediary products used in producing FeCl3 is chlorine, the price of which is booming given caustic soda prices and for which Tessenderlo will begin selling in 2018. Their major plant in Loos,France had to be converted to a membrane based technology from the current mercury based electrolysis which caused production to be lower in 2017 and should provide a tailwind in 2018. At full capacity the new plant should add ~€10mm in EBITDA.

Mining solutions is a joint venture set up with Barrick Gold whereby Tessenderlo built a thiosulfate facility at the mine in Goldstrike, Nevada to provide cleaner chemicals to improve the leaching process. There are opportunities to meaningfully expand this business.  

Management:

Luc Tack is one of the great investors/operators I have come across. You can find a couple of profiles online but generally he is reclusive and doesn’t talk to investors outside of the annual general meeting. His track record speaks for itself. He initially bought his stake in November 2013 at €22/share from the French government (27.5%). He used both personal cash and cash from Picanol for the investment. Since taking over Picanol in 2009 the stock is +1300% through 2017, revenues have increased from €250m to €700m, EBIT from (€28mm) to €121mm and net debt from 10m to net cash of €132mm. Shares outstanding have been flat.

In December 2015 Luc proposed a merger of Tessenderlo and Picanol which was rejected due to 1) investors did not want to combine the disparate assets that had no synergies (Picanol makes weaving machines) and 2) a price that was unfair and would provide for >50% control of Tessenderlo without a sufficient premium. Since that deal was proposed Picanol has performed exceptionally well with back to back record years in 2016 and 2017.

Financials:

The company has guided to flat EBITDA in 2018 which is the reason the stock sold off post earnings. While several reasons were given – startup costs from the new plant, fx headwinds of €10m, general uncertainty it is clear this is a management team that knows how to deliver results and has latent earnings power from the new capacities that have been built. Furthermore, the company is sitting on a lot of firepower with €150m of excess cash that they are looking to deploy into M&A.

As can be seen below I think the earnings power of the business is ~€3.65/share which I value at 12x-14x, or €44/share - €51/share. I then add €3.50 of excess cash for a price target of €47.50 – €54/share.

This does not include a large NOL in Belgium (>€300m NOL) related to losses on disposed assets prior to Luc taking over, value in a co-gen plant (~€1/share est.), and any upside from building out the engineering franchise (S8 Engineering started at the beginning of 2018 as refinery customers have come to Tessenderlo asking for consulting/engineering help given their expertise with Sulphur).

Catalyst

Deployment of excess capital

Increasing utilization from recent capital investments