Ingevity: Specialty Chemicals, Hardly A Special Valuation

Summary

• Ingevity is performing quite stable, demonstrating on a solid, yet modest sales and earnings growth.
• With a constantly lagging share price, valuation multiples have come down meaningfully, as has been the case for leverage.
• I like the set-up even more here, and following a decent earnings report and bolt-on deals, I am quite upbeat here.
• Looking for more investing ideas like this one? Get them exclusively at Value In Corporate Events. Learn More »

Maksim Labkouski

In February of last year I concluded that shares of Ingevity (NYSE:NGVT) looked relativity appealing, even after a number of deals being announced in recent years did not work out entirely as planned.

Ingevity is a specialty chemical business which was spun off from WestRock (WRK) in the first half of 2016, as initial investors have been hugely optimistic on its prospects. Just trading in its twenties at the time of the spin-off, shares rallied to the $100 mark in 2019 as the company went on a dealmaking spree in 2019, yet shares fell back as these transactions never fully lived upto expectations.

The Business

Back in 2018, the company produced specialty chemicals and high performance carbon materials. The specialty chemical business generated roughly two-thirds of sales, on which it posted margins of around 20%. The other materials activities were smaller, but far more lucrative.

End markets include carbon technologies, pavement technologies, industrial lubrication, and all these activities combined generated a billion in sales at the time, on which EBITDA of $243 million and earnings of $110 million were posted. These earnings were equal to around $2.50 per share in 2017, set to rise to $4 per share in 2018 as the company went on a dealmaking spree to boost earnings, but would increase leverage as well. That kind of earnings power with a near $100 stock made me very cautious at the time.

With the company guiding for 2019 sales at just over $1.3 billion and over $400 million in EBITDA, the company never really lived up to the expectations, missing these estimates that year as it guided for a number close to, but not hitting these targets for 2020 ahead of the pandemic.

Steady

In the end Ingevity only posted a 6% fall in 2020 sales to $1.22 billion, with adjusted EBITDA flattish at $398 million, as adjusted earnings of $203 million were basically flat at $4.88 per share, with GAAP numbers coming in close to these numbers.

Net debt of $975 million made that leverage ratios had fallen to 2.5 times and while the growth was not that impressive, a $70 per share valuation translated into non-demanding valuation multiples of around 14 times earnings. Amidst all of this I saw room for earnings power in excess of $5 per share early in 2021 when I last looked at the shares in this article, yet a desired dip to the sixties did not arise in 2021.

And Now?

Fast forwarding another year, it turned out early in 2022 that 2021 has been a solid year in which revenues up 14% to $1.39 billion. Adjusted earnings came in at $5.23 per share, yet GAAP earnings fell to just $3 per share, with most of the discrepancy coming from a litigation verdict of $85 million. EBITDA came in at $422 million, as net debt fell modestly to $929 million, which makes that leverage ratios fell to 2.2 times.

For 2022, the company guided for a reasonable outlook with sales seen between $1.525 and $1.600 billion, with EBITDA set to improve modestly to $430-$460 million, indicating that modest earnings growth should be expected, certainly on a per-share basis as the company is gradually buying back some shares here.

With just below 40 million shares now trading at $66, the resulting $2.6 billion equity valuation translates into a near $3.6 billion enterprise valuation. This values operations at around 2.4 times sales and 8-9 times EBITDA, all pretty reasonable. While this looks pretty solid, note that the fourth quarter has been a bit soft, as inflationary and supply chain issues hurt the business as well, not to mention higher energy prices as well of course.

In May, Ingevity posted strong first quarter sales up 19% to $383 million as adjusted earnings of $1.62 per share came in thirty-five cents ahead of last year, all based on a $119 million EBITA number, which is very strong. In August, Ingevity announced quite some news which includes a $60 million investment into lithium-ion anode material business Nexeon. Second quarter sales rose 17% to $420 million as adjusted earnings rose eighteen cents to $1.73 per share, trending at nearly $7 per share here. Net debt inched up to $975 million, still equal to 2.2 times EBITDA which now trends at $440 million on a trailing basis.

Another Deal

Alongside the second quarter results, which coincided with another deal early in August. Ingevity has reached a deal to acquire pavement marking materials business Ozark Materials to acquire the business in a $325 million deal. The deal for this US-based business adds some $150 million in revenues, initiating that a low 2 times sales multiple was paid, in line with the own valuation. With 20% margins, the $30 million EBITDA contribution marks a small premium at just over 10 times EBITDA.

Net debt following all this will increase to $1.36 billion, with EBITDA on a trailing basis posted at $440 million, this number will increase to $470 million following the Ozark business and runs close to $500 million already based on recent performance, translating into a 2.7 times leverage ratio, although this deal only closes later this year.

Furthermore, the company hiked the full year sales guidance to $1.525-$1.650 billion in sales by the first quarter already, with EBITDA seen at a midpoint of $450 million, indicating that things look pretty reasonable, although some softness will likely be seen in the second half.

With earnings power firmly on track to hit or surpass the $6 per share mark this year, and leverage still under control, despite two recent deals, valuations look not too demanding at 11 times earnings. Of course, there is the question of how these earnings will evolve given the economic environment out there.

Concluding Remark

With shares flat compared to early 2021, despite a reasonable 2021 and solid performance so far this year, I am warming upto the shares here, although appeal is arising in many corners of this market. Right here, Ingevtiy looks like a decent play here as I am looking to initiate some in the mid-sixties.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in NGVT over 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.

Comments

[Another Mountain's Rock Investing]

thx for the update

[The Value Investor]

@another Mountain's Rock Investing Very welcome