Ecovyst's Massive Buyback Plan Will Boost The Fair Value Per Share

May 29, 2022 11:25 AM ETEcovyst Inc. (ECVT)7 Comments4 Likes

Summary

  • Ecovyst is an important supplier to US refineries and plastic manufacturers.
  • The company has reshaped itself after divesting several business divisions.
  • The debt ratio has reached the desired level and almost the entire free cash flow to be generated over the next four years will be spent on share buybacks.
  • At the current share price, the company could easily repurchase a third of its shares. This should positively impact the value of the remaining shares.
  • Looking for more investing ideas like this one? Get them exclusively at European Small-Cap Ideas. Learn More »

sulfuric acid in bottle, chemical in the laboratory

Kittisak Kaewchalun /iStock via Getty Images

Introduction

Ecovyst (NYSE:ECVT) is a relatively small company in the chemical sector where it focuses on the production of silica-based catalysts which are critical components for the production of HDPE, the plastic used for bottles and containers. The catalyst technologies division also includes the Zeolyst joint venture which develops specialty zeolite catalysts and emission control systems.

Ecovyst Business Breakdown

Ecovyst Investor Relations

While this is an important division for Ecovyst, the majority of the revenue is generated in the ecoservices division which provides recycling services for sulfuric acid used in refineries to boost the octane level in fuel.

Ecovyst Breakdown of product applications

Ecovyst Investor Relations

The share price weakened in 2020 and 2021 as the company slimmed down due to divestitures and the secondary offering priced at $9.50/share didn’t help either.

Ecovyst stock price chart
Data by YCharts

The first quarter was okay when you look through the investments in the working capital

Business was clearly picking up for Ecovyst as the company reported a 40% revenue increase to almost $180M. The COGS obviously increased as well but thanks to the expanding margins, the gross profit jumped by approximately 60% to just under $48M.

It is even more remarkable the SG&A expenses barely increased and this caused the operating income to jump by more than 500% to just over $16.4M resulting in a pre-tax income of $13.6M and a net income of $7.9M which represents approximately $0.06 per share.

Ecovyst Income Statement

Ecovyst Investor Relations

While this does not sound very appealing as it indicates the stock is currently trading at about 40 times the annualized income in Q1, there is substantially more than meets the eye here. First of all, the operating expenses include a sizeable stock compensation factor while the capital expenditures tend to be lower than the depreciation expenses.

So, when we look at the company’s operating cash flow result, we see a $6.4M operating cash flow but this includes a $40.7M investment in the working capital position. This means the operating cash flow before adjustments in the working capital were approximately $47.1M but unfortunately, it’s not that simple.

Ecovyst Cash Flow Statement

Ecovyst Investor Relations

I’d like to draw your attention to two elements here. First of all, the company added back a $9.3M deferred tax. To be fair, we should deduct this again from the equation to make sure we use the ‘normalized’ result to figure out how attractive Ecovyst is at the current share price. Secondly, although the attributable profit from investments in affiliated companies was just $5.7M, Ecovyst did receive a $15M dividend payment. Again, to make sure we are running the numbers based on a normalized situation, we should perhaps deduct the $9.3M difference between the equity income and the received dividends.

That would result in a normalized operating cash flow of approximately $28.5M and a net free cash flow of around $17M after taking the capital expenditures into consideration.

The outlook for 2022 is very encouraging

Ecovyst has also confirmed its full-year guidance. It now expects to generate $810-830M in revenue resulting in an adjusted EBITDA of $260-270M. Considering the adjusted EBITDA was $59M in Q1, the Q2-4 2022 EBITDA will be around $200-210M.

Ecovyst is also guiding for an adjusted free cash flow result of $115-125M but it’s not very clear what the company defines as the ‘adjusted’ free cash flow result. However, based on the EBITDA guidance and the full-year capex guidance of $55-65M, it’s relatively easy to make our own calculations.

Let’s use a $260M EBITDA as a starting point. We know the annualized depreciation and amortization expenses are around $80M. This results in an EBIT of $180M. The interest expenses will be around $35M this year resulting in an EBT of $145M and a net income of $109M using an average tax rate of 25%. If we add back the $20M delta between the D&A expenses and expected capex, the underlying normalized free cash flow result would come out at around $129M so the company’s guidance of $115-125M seems very reasonable. At $120M, the free cash flow per share would exceed $0.85 so the current share price of just over $10 seems very reasonable.

Ecovyst Balance Sheet situation

Ecovyst Investor Relations

The net debt is currently approximately $750M and based on the EBITDA guidance, the debt ratio would fall below 3 (the 3.1 in the image above is based on the LTM EBITDA and not on the FY 2022 EBITDA guidance) which is slightly lower than what the company thinks is its sweet spot. This ‘issue’ will be solved with a stock buyback program. The board of directors has approved a $450M four year stock buyback authorization. The amount is not a coincidence as it comes pretty close to the anticipated free cash flow generation during the same time frame. So, while Ecovyst does not pay a dividend, it will spend its free cash flow on buying back its own shares.

This means the company could easily repurchase 7-8% of its own shares per year. If the share count would drop to 130M shares (from almost 138.7M shares now), a $125M free cash flow result would boost the FCFPS to almost $1.

Investment thesis

Ecovyst appears to be cheap and seems to offer good value as I certainly appreciate the company isn’t paying a dividend but instead prefers to use its strong free cash flow result to reduce the net debt and strengthen the balance sheet.

At a free cash flow yield of 8.5% and an EV/EBITDA ratio of around 8 (and decreasing fast) the company appears to be rather cheap, but the downside is obviously it does have quite a bit of exposure to the combustion engine sector and that likely helps to explain why the stock is trading at these levels. If we would expect the share count to drop to 125M shares by the end of next year while the EBITDA increases to $280M, the EV/EBITDA would already drop to just over 7, assuming a small decrease in the net debt from $750M to $725M.

I currently have no position in Ecovyst but I may try to write some put options in the near future but that will entirely depend on the liquidity.

Consider joining European Small-Cap Ideas to gain exclusive access to actionable research on appealing Europe-focused investment opportunities, and to the real-time chat function to discuss ideas with similar-minded investors!

This article was written by

The Investment Doctor profile picture
16.32K Followers
We zoom in on capital gains and dividend income in European small-caps
As I'm a long-term investor, I'll highlight some stockpicks which will have a 5-7 year investment horizon. As I strongly believe a portfolio should consist of a mixture of dividend-paying stocks and growth stocks, my articles will reflect my thoughts on this mixture.
Follow

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I could write put options in the near future but haven't made a decision yet.

Recommended For You

Comments (7)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.