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Valuation Mismatch Leads to Post-Spin MP Entry, +57% Upside

Yesterday was the first day of trading following the unique European Spin-Merger between Metso Corp. (MEO1V FH) and Outotec Corp. (OTE1V FH). This transaction created what is now Neles Corp. (NELES FH) and Metso Outotec Corp. (MOCORP FH), and the resulting valuation mismatch provides an opportunity for investors to see value creation for the Spin-merged mining equipment services company. Meanwhile, NELES (Parent) looks fully valued. Read on for more on their first day's performance.

What's Happened? The Edge Intelligence...
Metso Corp. (MEO1V FH) performed a unique spin of its Minerals business and combined it with another industrial player in the mining and minerals industry, Outotec Corp. (OTE1V FH) to form Metso Outotec Oyj (MOCORP FH, Spin-merged entity) aftermarket on June 30, 2020. The RemainCo (Flow Control division) is now operating as a pure-play entity and has been renamed Neles Corp (NELES FH, Parent). Nearly in-line with our expectations, MOCORP opened at €4.9, hit a high of €4.97, and eventually settled at €4.946. Meanwhile, NELES opened at €8.434, hit a high of €9.149 and ended the trading day at €8.91 (higher than our technical split price expectation of €7.30).

Our recent analysis on the Spin-merger can be seen here.

The Edge View...
NELES FH: We said that we were positive on NELES considering its leadership position in the pulp & paper industry, strong niche position in downstream oil & gas and it being among the leading suppliers of intelligent valve controls, which provides the company a strong market position and limits the chance of ceding ground to competitors.

Globally, ~70% of industrial gases and 60% of LNG flow through Neles valves. The company does not depend on its customers’ capex, which reduces vulnerability to end market capital investment cycles. The aftermarket spare parts requirements, maintenance and valve control show strong profitability, which helps NELES maintain healthy margins. Due to its strong cash generating capacity, we believe NELES will continue to meet its capital needs from internally-generated cash instead of relying on additional debt, thereby keeping its balance sheet light (through the separation, NELES now is net cash positive, with €57m in cash and cash equivalent and €56m in debt).

MOCORP FH: On the other hand we believe the merger of Metso and Outotec is a favorable move by the management to consolidate its position in the competitive capital equipment and services industry catering to mining, minerals and water management players. The merger will assist in boosting MOCORP’s market share and increase its geographic coverage. Over the years, the transition of Metso’s business model by lowering fixed cost and increasing the subcontracting or outsourcing of major fixed costs has brought about much-needed maneuverability in cost management for the company. Coupled with higher percentage contribution of services’ revenues assures continuation of higher degree of profitability in the long run for MOCORP. The increased scale and geographical reach due to the merger and the healthy backlog of Outotec Oyj makes it a compelling investment for investors. MOCORP trades at 6.4x FY21E EV/EBITDA multiple, at a discount of nearly 50% to its average peer multiple of 9.4x. Therefore, we see long-term value considering synergies from the merger, a manageable leverage position and profitable business model compared to its peers.