EUR 850.00 For Business Accounts Only

Morningstar | Positive Strategic Update for Clariant Assuming Sabic Deal Is Priced Fairly; Shares Rich

Clariant announced a strategic update with the closing of Sabic’s acquisition of 25% of Clariant’s shares. Key items include higher performance targets, Sabic’s increased representation in Clariant’s board and management, planned divestment of the pigments and masterbatches businesses, and the formation of a new business called high-performance materials that will include Clariant’s additives and high-value masterbatches and Sabic’s high-performance thermoplastics. In general, we think these items are positive. However, we can’t say for sure on the new high-performance materials combination as the valuation won’t be determined until mid-2019. We maintain our no-moat rating, but swapping pigments and masterbatches for high-performance thermoplastics is positive for Clariant’s moat. With transaction details yet to be determined, we assume the high-performance materials combination will be value-neutral. However, we expect to raise our estimates for the legacy business based on the strategic update, which will likely increase our CHF 19.50 fair value estimate by 5%-10%. At current levels, the shares continue to look overvalued.

Clariant upgraded its performance targets for its segments. Growth is expected to be roughly 1.5% higher in care chemicals and 1% higher in catalysis. Similarly, the EBITDA margin is expected to be around 1% higher in care chemicals and 3% higher in catalysis. In natural resources, growth expectations are unchanged but the margin is expected to be slightly higher. In the strategic update, the company laid out a strong pipeline of new products expected to launch in the near future. Consequently, we expect to raise some of our estimates.

Management and board changes confirm that Sabic has no intention of being a passive shareholder. Clariant’s board will be increased to 12 members with four members to be nominated by Sabic. Furthermore, current Clariant CEO Hariolf Kottman will leave his executive post to become chairman of the board. Ernesto Occhiello, Sabic’s specialties executive vice president, will become the new CEO of Clariant. Sabic reiterated it has no intention to effect a full takeover of Clariant. We continue to think Clariant will ultimately be fully absorbed by Sabic but do not expect a takeover announcement any time soon.

The new high-performance materials business will have sales of CHF 3 billion and an EBITDA margin around 20%. In our opinion, the business would likely earn a moat as we think additives and high-performance polymers tend to benefit from switching costs. While Clariant’s contribution to the new business’ total EBITDA is 35%, the deal will be structured so that Clariant is the majority owner. Consequently, a cash equalization payment will be transferred to Sabic at closing. Unfortunately, the final deal is not expected to be signed until mid-2019, so we cannot determine the valuation impact on Clariant. Clariant stated that the equalization payment would not cause its net debt/EBITDA ratio to exceed 2.4 times in 2019, which implies that the valuation for Sabic’s contribution would not be ridiculously high. Synergies are expected to be CHF 100 million, which is equivalent to 3.3% of the combined business sales. We don’t find this overly aggressive as we would expect some overlap between the businesses as Clariant’s additives are used primarily for plastics.

With the addition of Sabic’s high-performance thermoplastics, Clariant will finally be able to divest the more commoditized parts of its plastics and coatings segment: pigments, standard masterbatches, and medical specialties. These businesses generated total sales of EUR 1.6 billion and a 12% EBITDA margin in 2017. Divestment for a reasonable price would be a good outcome as the businesses are not moatworthy and have limited growth prospects. Clariant expects the divestments to be completed in 2020, after the closing of the proposed high-performance materials combination with Sabic.