Univar: Investor Day Outlines The Compelling Medium-Term Setup
Summary
- Univar’s investor day should give investors plenty of cheer, with its medium-term financial targets coming in well above expectations.
- The strategic pivot toward higher-value sales should also prove accretive should management successfully execute.
- With plenty of room for capital return as well, the current relative valuation discount seems unwarranted.
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Univar (NYSE:UNVR), a leading global chemical distributor and service provider, recently hosted an upbeat virtual Investor Day event, highlighting its updated plan to drive margin expansion and higher earnings growth over the medium term. In addition to improvements in the core business, UNVR plans to leverage its substantial asset base and the digital platform of its legacy distribution business, as well as transition further up the value chain to unlock incremental growth and margins beyond other specialty chemical distributors. With the strong balance sheet also likely to allow for outsized capital return and bolt-on acquisitions ahead, the current valuation discount to its closest peer Brenntag (OTCPK:BNTGF) should close over time.
Making a Solid Start with Encouraging Near and Medium-Term Outlook
UNVR’s latest strategy update indicates it has reached a comfortable and more stabilized position – this comes on the heels of years of portfolio adjustments, the successful integration of Nexeo, and the ongoing balance sheet deleveraging. Coupled with the slew of senior management changes in recent years, management was confident enough to provide a set of above-consensus medium-term financial targets. Specifically, UNVR has guided toward a 4.5% gross profit CAGR through fiscal 2024 and a c. 10% EBITDA CAGR (excluding fiscal 2021 price benefits), resulting in $960 million in organic EBITDA generation. The medium-term target also implies above consensus EBITDA margins and run-rate, as UNVR leverages its prior digital investments in SAP and its online marketplace, driving a c. $85 million EBITDA benefit through fiscal 2024.
Source: Univar Investor Day Presentation Slides
In lieu of its fiscal 2021 targets, management also unveiled its S-22 (“Streamline-2022”) program, headlined by a 9% EBITDA margin target by end-2022. In addition, management also appears to be taking a more holistic approach this time around, outlining a portfolio rationalization roadmap, along with new managerial responsibilities and digital investments. At first glance, S-22 looks set to be a two-phase process - first, trim the fat and then grow profitability (the latter being the key success factor). While ongoing debate remains around the sustainability of the pricing environment in 2021, I would note this plan embeds some conservatism, assuming some give back in earnings post price hikes from the recent supply chain disruptions.
Moving Up the Value Chain with Transition Toward ‘Specialty ‘Sales
Interestingly, UNVR’s latest strategic pivot is centered around building out scale in its specialty products distribution businesses. Specifically, the company pegged its specialty product mix contribution as c. 35% of sales and 50+% of EBITDA - a significant increase relative to legacy UNVR, which had higher exposure to bulk commodity markets. I view this as a positive move that should better align with investor perception placing the two largest broad-platform global chemical distributors (Brenntag and Univar) in a lower-quality category relative to the more highly valued, focused specialty distributors such as Azelis and IMCD (OTC:IMDZF). And with UNVR also guiding toward future gross profit growth for this business outpacing broader economic activity by 200+ bps, I see plenty of upside depending on the execution.
Source: Univar Investor Day Presentation Slides
Improving Free Cash Flow Generation Underpins Capital Allocation Optionality
While UNVR had limited capital deployment flexibility in recent years amid the integration of its Nexeo acquisition and COVID-19-led disruptions, in addition to optimizing its portfolio, UNVR still exited fiscal 2020 with a solid 3.5x leverage ratio. And with the ongoing improvement in the business and debt reduction throughout fiscal 2021, the company’s prospects are improving further – the debt position now stands at a comfortable 2.8x debt/LTM adjusted EBITDA despite working capital headwinds. Looking ahead, Univar remains positioned to benefit from even more deleveraging, with its guidance for a 2.0-2.5x longer-term target well within reach.
Source: Univar Investor Day Presentation Slides
With the balance sheet position improved, accretive bolt-on acquisitions and share repurchases are now on the table. While UNVR has recently initiated a c. $500 million share repurchase program over the next five years to offset any reward dilution, there remains plenty of room for more buybacks or a dividend payout in light of its attractive free cash flow generation. Another option is to reinvest in the business and pursue inorganic growth opportunities – the latter, in particular, could be key in helping UNVR catch up with its more richly valued distribution companies. In total, UNVR is targeting $300-$400 million of deals through fiscal 2024 to add c. $40 million in incremental EBITDA generation, which seems a tad conservative – an in-line 12x EV/EBITDA acquisition multiple would only result in leverage levels in the 2.0x range based on the medium-term EBITDA guidance.
Final Take
Having integrated the Nexeo acquisition and further optimized the portfolio, UNVR’s latest investor day highlighted that the company remains focused on moving up the value chain through a higher quality portfolio mix, along with the implementation of new initiatives to enable higher profit conversion. With the streamlined portfolio (i.e., less energy and agriculture exposure) pointing toward a more stabilized revenue base as well, expect more consistent profit generation through the cycles – this should go a long way toward improving investor confidence and driving an expansion of its relative valuation levels (note the current valuation remains well below its primary global peer Brenntag).
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