Thomas Barwick
Shares of Chase Corporation (CCF) have seen a small rebound again after a tough first half of the year. With the company announcing quite a large deal (for the size of its own firm), it is time to update a dated investment case here.
That investment case actually goes back to 2016, when I concluded that shares were largely fairly valued.
The Company - Back To 2016
Chase is a well-led industrial conglomerate which is run by the Chase family. Back in 2016, Chase was a collection of protective applications, used in insulation, coatings, detection tapes, chemical intermediates, and other items. At the time the business generated some $240 million in revenues, three quarters of which generated from the industrial segment, with construction making up for the remainder of revenues.
The company managed to grow sales by 150% in the decade leading up to 2016, with stable operating margins reported at 20% at the time. This growth was driven by solid organic growth, at times complemented by bolt-on dealmaking. The company announced a few smaller deals at the time, yet net debt was very modest.
On the $250 million run rate in terms of sales, Henkel posted operating profits of $50 million, on which it earned about $30 million, equal to $3.25 per share. With shares trading at 21 times earnings at $68 per share, this multiple marked a premium to the market and historical multiple of Chase, undoubtedly the result of strong operating performance at the time, as shares rose 70% that year, clearly indicating valuation multiple inflation.
That conclusion led me to conclude to not "chase" the shares, as the risk-reward did not look too compelling to get involved at the time.
Caution Saves The day
Fast forwarding between 2016 and today in 2022, shares have seen strong returns at the initial part of this time frame. Shares broke the $100 mark in 2017, but shares have been range bound between $80 and $120 in the five-year period ever since. After trading at the high end of the range in the summer of last year, shares fell to $75 in recent weeks, now trading at $92 per share.
In November of last year, Chase posted its 2021 results. Full year revenues rose in a modest fashion compared to 2016, with revenues reported at $293 million as the company maintained steep operating margins around 20%, with operating profits posted at $60 million. With net earnings posted at $45 million, earnings came in at $4.73 per share, which basically reveals that the move from $68 in 2016 to the $100 mark has happened in line with earnings per share growth over this period.
That was a bit too shortsighted, as the company has managed to grow a modest net debt load in 2016 into a net cash position of $120 million, equivalent to roughly $13 per share. If we account for this, valuations have become a lot less demanding.
In the first three quarters of this year, the company grew sales by about 10%, largely driven by pricing hikes, as earnings have been flattish. With 9.5 million shares outstanding now trading at $92, the market value compares in at $874 million, or $750 million if we factor in the net cash position.
Putting Money To Work
Just after the release of the third quarter results, Chase announced a huge deal. The company has reached a deal to acquire Nucera Solutions in a $250 million deal, a deal which will basically turn a current net cash position of more than $120 million into an equivalent net debt load.
Nucera produces specialized polymers and polymerization technologies, used in a broad range of services. The deal involves a prime production facility in Oklahoma, employing 130 workers at its headquarters and some international sales offices. The deal is set to add $83 million in revenues, implying a 3 times sales multiple has been paid. With adjusted EBITDA margins in excess of 25%, we see at least $21 million in EBITDA, for a maximum 12 times EBITDA multiple being paid. In comparison, Chase trades around 10 times EBITDA as its own valuation is quite modest at 16-17 times 2021 earnings, after backing out net cash holdings.
Pro forma EBITDA will likely come in around $100 million, as Chase reports that it expects a 1.2 times leverage ratio, in line with my own calculation. With EBITDA set to see a boost of 25%. Assuming $21 million in EBITDA being contributed, a million in depreciation expenses, some $3 million in incremental interest costs and a 20% tax rates, I see potential to add about $1.50 to earnings, with pro forma earnings seen close to $6 per share.
This means that, based on such earnings power, the multiple drops to 15 times, as modest net debt has been incurred, yet this is still very manageable. While the acquisition multiple was a bit higher than the own valuation in the Nucera deal, and Chase could have perhaps earmarked more funds to buy back stock at lower levels, the overall impact is a positive one.
Chase is making a move higher, and earnings could really be seen at $6 per share, or higher, all while leverage is very modest and resulting earnings multiples are non-demanding at 15 times. This is a modest multiple given the solid long term positioning as years of stagnation mean that there is room for valuation multiple expansion down the road.
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