It’s time to take a bit detour after primarily discussing dividends this month. In this case, we’ll talk about AdvanSix Inc. (NYSE:ASIX), a small-cap chemical provider primarily based in New Jersey. In 2020, I began researching the corporate for personal purchasers as a result of of its agriculture publicity, which I’ll talk about on this article. The set off was by no means pulled as a result of we discovered a greater agriculture-focused various. Yet, the inventory accelerated from lower than $10 to at the moment greater than $45. Now, I’ll revisit the inventory and provoke protection for the primary time on Seeking Alpha as the corporate remains to be means too low cost and an enormous beneficiary from re-shoring and sky-high chemical margins.
Now, the corporate has an extremely wholesome steadiness sheet, a excessive free money movement yield, rebounding EBITDA, and a strong enterprise mannequin to offer sustainable earnings.
AdvanSix, Small But Important
Let’s begin with the fundamentals. What does AdvanSix do? Based in Parsippany, New Jersey, AdvanSix is a provider of chemical merchandise with a $1.31 billion market cap.
The firm began buying and selling in late-2016 when it grew to become an impartial firm. In 2016, AdvanSix was spun off from industrial big Honeywell International (HON). I wager that some folks studying this are Honeywell shareholders who bought shares in 2016.
ASIX generates is gross sales in 4 enterprise segments, none of which introduced in lower than 19% of whole gross sales in 2021. The firm produces nylon, caprolactam (used within the manufacturing of nylon), chemical intermediates used within the manufacturing of adhesives, paints, coatings, and others, in addition to ammonium sulfate, used as fertilizer, an herbicide, and for a number of industrial functions.
Especially in these occasions of damaged provide chains and corporations that transfer away from China (re-shoring) – which I defined on this article (I like to recommend you have a look) – it is an enormous profit that ASIX has three US-based factories.
Not solely does the corporate produce its merchandise within the United States, however it’s also effectively utilizing its personal provide chain to provide its personal wants. For instance, the phenol it produces within the Frankford Plant is (partially) utilized in its Hopewell Plant, which produces merchandise which can be additionally utilized in its Chesterfield Plant.
To quote the corporate:
Our built-in manufacturing course of, scale and the amount and vary of our merchandise make us some of the dependable and environment friendly producers in our business. We persistently deal with and put money into enhancing manufacturing yields from our numerous manufacturing processes to construct on our main value place. Our international logistics infrastructure permits a dependable intra-plant provide chain and constant and well timed supply to our prospects.
Moreover, whereas solely 18% of 2021 gross sales have been non-USA revenues, the corporate sees itself positioned to service rising export demand because of its freight and logistics capabilities and terminal areas.
Additionally, and that is very fascinating, the corporate competes with corporations like BASF Corp. and LANXESS, two German chemical powerhouses. These two corporations – like all European producers – are at the moment affected by sky-high vitality costs. Even if Russia refrains from shutting off pure gasoline exports, ASIX can have a profit in sure merchandise (increased export demand) because of decrease enter prices (comparatively talking).
So Much Value In ASIX
In different phrases, ASIX advantages from re-shoring of provide chains (long-term), excessive post-COVID demand for chemical compounds, struggling competitors abroad because of excessive vitality costs, and powerful agriculture demand for its ammonium sulfate merchandise.
As a outcome, the corporate is doing very nicely financially talking. Last yr, the corporate did $1.7 billion in gross sales, which allowed ASIX to do $255 million in EBITDA and $162 million in free money movement.
In 1Q22, the corporate grew its gross sales by 27% in comparison with a robust 1Q21. This efficiency was brought on by 29% increased gross sales costs, 2% increased gross sales because of M&A, and 4% decrease volumes. In different phrases, sturdy pricing benefited this chemical firm.
EBITDA surged by 79%. According to the corporate:
EBITDA enhance pushed primarily by improved market-based pricing, internet of elevated uncooked materials prices, notably pure gasoline and sulfur, partially offset by increased utilities value pushed by pure gasoline costs, and decrease gross sales quantity.
The EBITDA bridge under exhibits how highly effective ASIX is in terms of utilizing its pricing energy:
The graphs under present why ammonium sulfate changed into such an enormous tailwind. Between January 2021 and April 2022, costs of Corn Belt ammonium sulfate have risen from roughly $1,000 per ton (nitrogen content material foundation) to virtually $3,600.
Thanks to this bull market, the sale of ammonium sulfate accounts for greater than 30% of whole firm gross sales and greater than 50% of whole gross sales quantity. 75% of the corporate’s gross sales are home gross sales.
In this case, the corporate advantages from quite a lot of tailwinds which can be agriculture tailwinds on the whole. Global crop provide is beneath stress because of low inventories, excessive fertilizer prices (brought on by excessive vitality costs), the continued conflict in Ukraine, excessive demand, and constrained logistics. ASIX advantages from all of those developments as it is a home producer with comparatively brief provide chains, and the flexibility to ship extra than simply fertilizer.
As the TIKR graph above exhibits, the corporate goals to generate near $400 million in EBITDA in 2022. This is anticipated to come back with $215 million in free money movement primarily based on near $99 in capital expenditures. Note that free money movement is working money movement minus capital expenditures. It’s money an organization can use to distribute a dividend, repurchase shares, or enhance steadiness sheet well being.
$215 million in anticipated free money movement interprets to a 16% free money movement yield utilizing the corporate’s $1.31 billion market cap. In different phrases, if the corporate needed, it may pay a 16% dividend or purchase again 16% of its shares.
A 16% dividend yield is not taking place, but it surely exhibits how highly effective the corporate’s funds have turn out to be. On November 5, 2021, the corporate initiated a $0.125 quarterly dividend. This interprets to $0.50 per share per yr. That’s a 1.07% yield utilizing the present inventory value. While there’s room to hike the dividend, this isn’t presupposed to be a dividend-focused article.
What I care most about is what the corporate spends extra money on. In 1Q22, the corporate acquired U.S. Amines, a number one North American producer of high-value intermediates utilized in agrochemicals, prescribed drugs, and different functions for a complete value of $98 million. The firm additionally repurchased greater than 181 thousand shares for $38.6 billion.
It’s improbable to see that the corporate is now utilizing the commodity bull market to enhance its enterprise, shopping for again shares, and initiating a dividend. Moreover, internet debt is anticipated to be detrimental in 2023 (more money than gross debt) as free money movement is greater than doubtless increased than any buyback or acquisition plans.
Besides that detrimental internet debt is nice information on the whole, the corporate will enter the following financial downturn in its business – every time that could be – with a a lot more healthy steadiness sheet, which can cut back draw back threat.
Moreover, it makes the valuation a lot juicier.
ASIX has a $1.31 billion market cap. 2022 internet debt is anticipated to be $65 million. The firm additionally has near $20 million in pension-related liabilities. All of this offers the corporate an enterprise worth of $1,395 million.
This offers us an EV/EBITDA a number of of three.5x utilizing 2022E EBITDA of $400 million and 4.0x utilizing 2023E EBITDA of $350 million. The decline is anticipated as a result of analysts don’t imagine that the sky-high margin surroundings will final.
While it is onerous to determine a “goal” a number of, I’d make the case that an organization like ASIX mustn’t commerce under 6.0x EBITDA. This would give us a “truthful” worth of $2.1 billion utilizing 2023 estimates. In different phrases, if the corporate is ready to proceed excessive EBITDA technology after margins come down a bit getting into 2023, it might be buying and selling at $75 per share.
Normally, I name this “Takeaway”. Yet, on this case, I wish to share my ideas a bit extra. What we’re coping with here’s a small-cap firm that has much more potential than the market is giving it credit score for. The Honeywell spin-off ASIX has turn out to be an organization with a terrific place within the North American chemical provide chain. After a devastating downtrend between 2018 and 2020 erased most of its market cap, the corporate is now lastly able that permits it to erase its internet debt, purchase new corporations to reinforce its enterprise mannequin, and distribute money utilizing dividends and buybacks.
Right now, the corporate advantages from regular chemical demand (ex-agriculture), sky-high margins in its agriculture section, sturdy free money movement, falling debt, and a good valuation.
While I give the corporate a excessive truthful worth, that is under no circumstances a name to go chubby ASIX. I’ve 95% of my cash invested in dividend development shares and my primary goal is to debate long-term funding alternatives. Trading alternatives ought to all the time be seen as a “bonus” on the facet. If I purchase ASIX, it will likely be a really small place. It additionally signifies that in the event you’re not a dealer, do not begin now. Only purchase ASIX you probably have a buying and selling portfolio and in the event you’re on the lookout for publicity within the business.
After all, ASIX stays a margin play. While I do count on a long-term uptrend because of provide chain re-shoring after the pandemic, that uptrend will doubtless be very unstable. Between 2018 and 2020, the corporate misplaced roughly 80% of its market cap because of decrease demand and decrease margins. A low-margin surroundings can come again sooner or later. While the corporate is now in a a lot better place because of a more healthy steadiness sheet, it would greater than doubtless trigger injury once more.
Moreover, earlier this yr, the inventory briefly dropped under $35. It rebounded, but it surely goes to indicate what sort of volatility buyers can be uncovered to.
So, lengthy story brief, I’m bullish on ASIX. The firm is in a great spot, and I like what administration is doing with the corporate. If you wish to purchase it as a commerce, attempt to get in as near $40 as potential. At that time, the mid-term threat/reward is actually good.
(Dis)agree? Let me know within the feedback!