Morningstar | Balchem Announces Chemogas Acquisition and CM-AT Progress on 1Q Earnings Call; Raising FVE to $90
Our fair value estimate for Balchem rises slightly to $90 per share from $89 after accounting for the company's first-quarter results and its announced acquisition of Chemogas. While the performance of Balchem's core operations was steady, as usual, in the first quarter, management shared some significant news during the earnings update.Most importantly, Balchem has reached an agreement to acquire Chemogas, a privately held specialty gases company based out of Belgium. Chemogas specializes in the packaging and distribution of ethylene oxide, already a core competency for Balchem, and should fold seamlessly into Balchem's specialty products operations. Management expects Chemogas to deliver a 30% EBITDA margin on EUR 30 million of revenue in 2019. Given a purchase price of EUR 95 million, this represents a 10.6 times multiple. Although we tend to believe mergers and acquisitions are value-destructive more often than not, this deal represents a highly attractive purchase price. We assign a 12.5 times terminal Balchem as a whole, and the specialty products business is the only wide-moat business unit across Balchem's four reporting segments.
Regarding the CM-AT experimental autism treatment for which Balchem provides the delivery system, the earnings call revealed more progress than we've grown accustomed to. Curemark, which developed the treatment, will be submitting a biologics license application soon. Additionally, we should receive incremental news soon regarding phase 3 trial efficacy. For now, however, our CM-AT assumptions are effectively unchanged.
Balchem is engaged in the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical, medical sterilization and industrial markets. The company has four reportable segments: Human Nutrition & Health, which provides human grade choline nutrients and mineral amino acid chelated products for nutrition wellness applications; Animal Nutrition & Health, which provides nutritional products in addition to basic choline chloride; Specialty Products, which provides ethylene oxide and propylene oxide; and Industrial Products, which provides certain derivatives of choline chloride, as well as manufactures and sells methylamines.
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