Specialty chemicals is a sector label that really doesn't tell investors all that much, as it includes a wide range of companies with very different end-markets and operating characteristics. That said, specialty chemicals do usually stand out as having above-average full-cycle returns than more commodity-oriented chemical companies. With that backdrop, I think Taminco (TAM) is worth a closer look as a pretty special specialty chemical company.
All About Alkylamines
Taminco is built around alkylamines, chemicals made by combining various alcohols with ammonia. Without going too far into Chem 101, alkylamines have a variety of uses in multiple end-markets as they are often quite useful at neutralizing acidity and removing contaminants.
Built through multiple acquisitions, Taminco has uncommonly high market share for a chemical company. Across North America and Europe, Taminco has about two-thirds and 60% share of alkylamines in general, with even higher share in higher alkylamines (and somewhat lower share, 50%, in methylamines). DuPont (DD) and BASF are the only real rivals with scale in North America, while BASF is the company's primary competitor in Europe (with share in the high 30%'s).
Taminco's business is divided up into Functional Amines (45% of sales), Specialty Amines (43% of sales), and Crop Protection (12% of sales), but there is a lot of "cross-talk" between these units. For instance, about 30% of Functional Amine production goes into Specialty Amines, and about 50% of the company's agriculture sales come from ingredients for herbicides that come out of the Functional Amines business.
The company also recently added a formic acid business. In late December, Taminco announced its intent to acquire Kemira's formic acid business for $190 million in cash. This business has about 30% to 35% share in Europe (BASF dominates with nearly 60% share), but it does have some overlap with the animal nutrition and pharmaceutical markets Taminco already serves and is similar in some other respects to its core alkylamines business.
About half of the company's sales are to North America, with another 35% to Europe. Asia is becoming an increasingly significant market (9% of sales), and Taminco is building a specialty amines plant in Nanjing, China. Approximately 40% of Taminco's COGS ties back to natural gas (ammonia, methanol, acetone, and ethylene oxide), but about 50% of volume sold is sold under cost pass-through contracts. With that, Taminco's EBITDA margin has been consistently above 20%, up there with Eastman (EMN) and Celanese (CE) and better than most chemical companies.
Multiple End-Markets With Attractive Growth Characteristics
One of the positives to the Taminco story is that the company serves a significant number of large markets with both above-average growth prospects (compared to global GDP) and little-to-no economic cycle sensitivity. Roughly 80% of the company's volumes go to these attractive markets, and the amines Taminco sells are typically 10-15% of end-product costs.
Agriculture (agrochemicals) is the largest single end-market, commanding about a third of the company's volume. This is split among products like fungicides (where the company has 50%-plus share), soil fumigants, and herbicides where Taminco sells to companies like Dow (DOW) and Syngenta (SYT). While the ag market does have it owns cyclicality, it's not really tied to GDP growth and overall use of herbicides and fungicides has been increasing faster than acres under cultivation.
Animal nutrition is the next-largest business (about 15% of volume), where Taminco provides choline chloride for the animal (chicken and pig) feed market. The personal/home care market is almost as large for Taminco, and the company likewise has sizable share selling products like DIMLA and DMAPA to companies like Procter & Gamble and Huntsman (HUN).
Last and not least are water treatment and energy, which combine for about 20% of volume (water treatment being about 50% larger than energy). Taminco has over 50% share of the market for DMAE (used to make flocculants and coagulants for water treatment). In the energy market, Taminco supplies amines that refineries use to "sweeten" gasoline, but the company has more recently begun selling choline chloride as a clay stabilizer for shale gas drilling/production.
What Can Go Wrong?
Taminco was taken public by Apollo, and it should be no surprise that the company was taken public with a significant amount of debt. The debt load is not too onerous relative to the magnitude and stability of the company's cash flow, but it is a risk all the same. Likewise, Apollo maintains a very large ownership position and board control, and I would expect to see share sales in the future.
Basic competition is also a threat. Given the stability and profitability of the alkylamine business, an ethyleneamine/ethanolamine producer like Dow or Huntsman could see this as an appealing market. That may not be so true for Dow now that it is reconsidering and realigning its operations, but a world-class plant could likely be built for around $100 million to $200 million, well within the scope of what Dow or Huntsman could manage.
I also would think competition from Asia could be a growing risk factor in the coming years. The one drawback to that could be the role of natural gas. As natural gas is a key input in alkylamine production, I'm not sure Asian producers will have the necessary access to highly affordable natural gas (though China is looking to exploit their gas shales).
There is also a risk that Taminco continues to be active in M&A and buys the wrong asset(s) or overextends its balance sheet. The company recently announced a manufacturing joint venture with Balchem (a Taminco customer) to produce choline chloride, though I consider it a positive that the company has now established a U.S. production base for this product.
The Bottom Line
Trying to value chemical companies with a DCF approach is typically a fruitless exercise, and that's even the case for a company like Taminco with unusually high EBITDA margins and above-average stability. With that, I turn to forward EV/EBITDA. A regression of returns on capital to EBITDA multiples would suggest that Taminco could support a 10x multiple, but I think it is appropriate to apply a discount for the debt and Apollo's stake. A 10% discount (a 9.0x multiple) would put Taminco in line with the average of other specialty chemical companies, and that seems appropriate to me. Fair value comes just under $26 by that methodology.
A 20% discount to fair value is not huge, and there are risks of disruptions to the ag chemicals business this year from lower planting. Even so, I think this is a very interesting chemical company with an uncommon economic moat and I think it is worth a closer look as an investment candidate.