Description

Long Venator-$2.75

Contrarian View

-Street assuming VNTR will not generate FCF anytime soon based on normal maintenance and Pori-related cash expenses but that will start to level off starting next year

-Pori cash expenses of 70mm go to 25mm in 2020 and continues at that level in 2021

-Management intensely focused on free cash flow generation; cash taxes will remain low: long-term adj. effective tax rate of 15-20%; cash tax rate of 10-15%; $1.1bn of Net Operating Losses

-2021e EBITDA                                  300mm (250-260 run rate plus 40mm of cost improvements assuming no price improvement)

Capex                                                    (125)

FCF                                                         $38mm

                Per Share                                            $.36/share

 Deep value on several metrics

-Trading at 38% of replacement value (782k metric tons of capacity @$2000/ton)

-3.5x EV/Normalized EBITDA ($300mme in 2021)

-P/E of 4x 2021e EPS, 8x 2021e FCF/share

Extreme stock sell-off disproportionate to fundamentals and recent trajectory of Titanium Dioxide prices

           -EBITDA down 50% from 2018 high while stock is off over 90% (Hun overhang, small cap pressure etc)

           -Destocking that affected prices mostly in Europe in Q1 and Q2 of 2019 appears to be over according to industry consultants.  

 -Global TiO2 prices stabilized after 4 down quarters. CC and peers (KRO, TROX) said on their recent earnings calls that prices stabilized sequentially in 2Q as customer inventory destocking ran its course. Prices are flat in 3Q in the US and EU and export prices have risen in China due to pressure from higher ore costs (Ilumenite and Rutile). 3Q is the first time prices have not declined on a y/y basis since 2Q 2018. Consultants expect prices to be flat in 2H19, and may be set to increase in 2020 depending on how the trade situation plays out.  

VNTR somewhat protected from TIO2 commoditization down cycle

-60% of capacity exposed to to high margin specialty/differentiated TiO2; 60%–65% global market share in the niche specialty and high margin anatase grade TiO2 market, which is mainly used in the manufacture of nylon fibers and specialty inks.  Anatase TiO2  more profitable and stable business compared with the more traditional and commodity rutile grade of TiO2

-End-market, and geographic diversity; Venator has good end-market and geographic diversification (24% US, 71% Europe/Other, 5% China); End markets are Plastics (36%), Architectural Coatings (28%), Industrial Coatings (14%), Personal Care (5%)

-2019 Business Improvement Program to deliver $40mm annual EBITDA benefit which cushions the current downturn

Performance Additives business has more stable annual earnings/cash flow

-Q2LTM $540 in revenue and $46mm in EBITDA (25% of revenue and 19% of EBITDA)

-Includes functional additives, color pigments, timber treatment and water treatment businesses “Ten largest customers accounted for approximately 13% of the segment’s sales in 2017 and no single Performance Additives customer represented more than 10% of our sales in 2017. Performance Additives segment sales are made directly to customers through our own global sales and technical services network, in addition to utilizing specialty distributors. Our focused sales effort, technical expertise, strong customer service and local manufacturing presence have allowed us to achieve leading market positions in a number of the countries where we manufacture our products. We sell iron oxides primarily through our global sales force whereas our ultramarine sales are predominantly through specialty distributors. We sell the majority of our timber treatment products directly to end customers via our joint venture Viance.

Our primary competitors within color pigments include Lanxess AG, Cathay Pigments Group, Ferro Corporation and Shanghai Yipin Pigments Co., Ltd.”

-9-15% EBITDA margin $50-100mm through the cycle which is less cyclical than TIO2 business (see table below)

Balance sheet in good shape

-Liquidity of $307mm as of June 30, 2019

-$50mm of cash and $350mm available under the ABL

-Net debt leverage of 3.0x

-No significant debt maturities until 2024

Recent Insider buying

                -CEO bought 40k shares at $2.70

                -CFO bought 20k between $1.85-2.23

                -Director bought 60k at $2.69

Risks

-Venator’s underfunded pension of $222 mm as of Dec. 2018 increases net leverage to 4.0x from 3.0x.

-Pricing takes another down leg as capacity utilization is still above average relative to history

Sources:  Company filings, Industry data.

Catalyst

Potential Catalysts

-Sale of additives business; estimate proceeds of $375 mm (5x mid-cycle EBITDA) would de-lever balance sheet and provide capital for significant share buyback  

-Huntsman stake now under 50% and could be sold eventually to remove overhang