EUR 850.00 For Business Accounts Only

Morningstar | Celanese Continues Strong 2018; Raising Our FVE to $100 on Higher Near-Term Profit Outlook

Celanese reported strong third-quarter results as operating EBITDA grew 35% year on year to $571 million. This performance was led by the cost-advantaged acetyl chain business, which benefited from price increases in excess of raw materials cost inflation. Over the near term, we expect the business' elevated margins to persist. Having updated our model to reflect higher near-term acetyl chain profits, we increase our fair value estimate to $100 per share from $98. Our narrow-moat rating is unchanged.

In the acetyl intermediates segment, which generates over 80% of profits for the acetyl chain business, operating EBITDA grew over 75% year on year to $281 million. The segment primarily produces acetic acid and vinyl acetate monomer, largely from natural gas-based inputs. However, marginal cost producers who set market prices, typically use oil-based inputs, which has allowed Celanese to raise prices based on higher oil prices, while its expense growth has remained lower. As a result, the segment has generated EBITDA margins in excess of 30% during 2018, compared with 22% in 2017.

While we expect the elevated spread between brent oil and natural gas to remain in place over the next couple years, we continue to forecast that oil prices will fall from their current levels around $80 per barrel to $60, while we forecast U.S. natural gas prices will fall by a smaller degree from $3.20 per MMBtu to $3.00. As a result, we expect Celanese's long-term acetyl chain EBITDA margins will decline to 20%.

In the engineered materials segment, which produces downstream products such as plastics used for lightweighting vehicles, operating EBITDA grew 17% year on year to $218 million, driven by higher volumes and higher prices. To grow the downstream business, Celanese is pursuing a tuck-in acquisition strategy, where the firm aims to purchase two smaller businesses each year. While we evaluate each individual transaction based on its own merits, we are generally in favor of this approach as it benefits the cost-advantaged acetyl chain business through higher sales volumes and greater capacity utilization.

Further, by focusing on smaller size businesses, there is less risk for shareholders that a single acquisition will materially destroy value. We continue to be in favor of management's disciplined approach to capital allocation. We also like its focus on growing volumes of its cost-advantaged products. Both practices underpin our Exemplary stewardship rating.