Embed Size (px)
DESCRIPTION
Full version of stock pitch presentation made to the weIMG club at Chicago Booth
Citation preview
• Nalco is a service-based specialty chemical company that provides solutions to treat water and enhance air quality for industrial & institutional use
Operates in 3 segments: Water & Process Services, Energy, and Paper
• Capitalization:Enterprise value(1): $6.8 billionEquity market value: $3.2 billionAdjusted net debt(1) / Enterprise value: ~53%
• Recent valuation multiples:Consensus implied forward P/E: 2010: 18.2x ; 2011: 13.6x (4yr average: ~19x)Average PEG ratio for the past 4 years: ~0.6Adjusted EV/EBITDAR of ~ 9.5x in the past 4 years
Long Idea: Nalco
(1) Includes unfunded pension & OPEB obligations of $497 million and capitalized value of operating lease of $169 million.(2) Based on the five-day average closing price between 11/06/2009 and 11/12/2009.
Ticker: “NLC”
Current Price: $23(2)
1 Yr. Target Price: $28
1 Yr. Expected Return: > 20%
Nalco Stock vs. S&P 500 (2008 – YTD 2009)
52 wk High: $8
52 wk Low: $24
Beta: 1.38
Sticky service-based business model misunderstood by the StreetNot all products & services are exposed to economic volatility
Strong earnings power underneath a large debt loadFCF generation increased during the recession
New CEO understands past missteps; focused on reinventing NalcoSolidifying position in “BRICs+”(1) markets after years of under-investmentBorrowed DuPont playbook: Retraining Nalco’s sales force (mostly P. Eng & PhD)
Innovative new products + Operational Stability = Multiple Expansion3D TRASAR for boilers has outsize market potential
Nalco is in the epicenter of favorable long-term secular themes in water treatment, energy production, and air pollution
Essential to support infrastructure required to drive economic development
Long Thesis: Investment Highlights
(1) Refers to the “BRICs” (i.e. Brazil, India, Russia, China) and countries in Europe, Africa, and Middle East
Water Treatment Industry is Highly Fragmented
Source: Nalco Presentation “MVA” is Manufacturing Value Added
Nalco has sizeable scale over its competitors – each of which is less than half its size
Sizeable Opportunity for Nalco to make selective “tuck-in” acquisitions
• Upside surprise #1: Growth from “BRICs+” (~42% of ‘08 Revenues)Recurring business alone has historically grown 3-4% per year
• Upside surprise #2: Robust 3D TRASAR sales (boiler & cooling tower)High margin offering that reduces customer maintenance CapEx & O&M costsUnit sales for boiler application in ’09 at same level as ’08, despite the recession“Foot in the door” for other sales opportunities (e.g., Mobotec)
• Upside surprise #3: Continue to deliver cost savings Surpassed $100 million goal in 2009 in Q3; raised full year target to $150 millionEmployee bonus tied to level of cost savings achieved
• Risk of inability to refinance debt has been laid to restNext large repayment ($490 million) not due until Q3 2011Nalco stock sold off during the credit crisis due to heightened refinancing risk
What the Consensus is Missing
In addition to the upside surprises, investors need to look past 2010 and realize that industrial and energy production will not remain idle, especially in BRICs+ markets
Why the Sell-Side does NOT Understand NalcoExcerpt from Barclays’ November 3, 2009 research note (pg.3)
Colder weather does not have an affect on the efficiency of a plant’s cooling system as water is discharged from boilers at very high temperatures. Therefore, the usage
of chemicals to treat a plant’s cooling water is not affected by seasonality
Strong and Consistent Earnings Power
2008: Up 3.7% excluding $23m contribution from Synfuels division in the prior year (business
closed at end of 2007)
~7% CAGR
~6% CAGR
Source: Nalco presentation
Relative Valuation: Still Below Fair Value
Because of the significant amount of debt held by Nalco compared to its peers, comparative valuation using TEV/EBITDA multiple is the most appropriate.
Stock Price Mkt Cap Unadj TEV Net Debt/Company (in $US) ($mm) ($ mm) TTM EBITDA 2010e 2011e 2010e 2011e 2010e 2011e PEG
Danaher 72.00$ 23,129$ 24,443$ 0.7 x 2.0 x 1.9 x 10.9 x 9.9 x 18.5 x 16.4 x 2.35
Ecolab 46.00$ 10,930$ 11,801$ 0.8 x 1.9 x 1.8 x 10.0 x 9.2 x 20.4 x 17.8 x 0.68
Pall Water 34.00$ 3,975$ 4,278$ 0.7 x 1.7 x 1.6 x 9.7 x 8.7 x 17.5 x 14.8 x 1.09
Kurita Water Ind. 32.00$ 4,117$ 3,880$ -0.5 x 1.7 x 1.6 x 7.9 x 7.1 x 20.8 x 18.3 x 2.12
Tetra Tech Inc. 26.00$ 1,575$ 1,581$ 0.0 x 1.0 x 0.9 x 9.6 x 9.6 x 19.1 x 16.8 x nm
Calgon Carbon 14.00$ 784$ 768$ -0.3 x 1.6 x 1.5 x 8.6 x 7.4 x 17.7 x 14.8 x 0.82
Mean 0.2 x 1.7 x 1.6 x 9.4 x 8.6 x 19.0 x 16.5 x 1.41 High 0.8 x 2.0 x 1.9 x 10.9 x 9.9 x 20.8 x 18.3 x 2.35 Low -0.5 x 1.0 x 0.9 x 7.9 x 7.1 x 17.5 x 14.8 x 0.68
Nalco Holding 23.00$ 3,178$ 6,113$ 5.3 x 1.5 x 1.4 x 8.5 x 7.7 x 17.0 x 13.3 x 0.29
Variance to Comps 2060% -9% -8% -10% -11% -11% -19% -79%
TEV/Revenues P/ETEV/EBITDA
23$ 8.5 x 9.0 x 9.5 x 10.0 x 10.5 x-10.0% 645$ 19$ 21$ 23$ 25$ 28$ -5.0% 681$ 21$ 23$ 25$ 28$ 30$ 0.0% 717$ 23$ 25$ 28$ 31$ 33$ 5.0% 753$ 25$ 28$ 30$ 33$ 36$
10.0% 789$ 27$ 30$ 33$ 36$ 39$
EV to 2010 EBITDA
2010
e EB
ITD
AP
rem
ium
/ (D
isco
unt)
23$ 1.5 x 1.6 x 1.7 x 1.8 x 1.9 x-10.0% 3,610$ 19$ 20$ 23$ 26$ 28$ -5.0% 3,810$ 21$ 23$ 26$ 28$ 31$ 0.0% 4,011$ 23$ 25$ 28$ 31$ 34$ 5.0% 4,211$ 25$ 27$ 30$ 33$ 37$
10.0% 4,412$ 27$ 30$ 33$ 36$ 39$
EV to 2010 Revenues
2010
e R
even
ues
Pre
miu
m /
(Dis
coun
t)
DCF Valuation: Looking Beyond 2010
On a DCF basis, Nalco’s shares appear to be ~30% undervalued as the outsize growth in the next 5 years is not reflected in 2010 forward TEV/EBITDA multiple
Terminal2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e Value
EBITDA 717$ 799$ 852$ 903$ 953$ 996$ 1,041$ 1,067$ YoY % Growth 26.2% 11.4% 6.7% 6.0% 5.5% 4.5% 4.5% 2.5%
CapEx (112) (118) (125) (128) (131) (134) (138) (141) Change in Net Working Capital (14) (28) (29) (32) (36) (39) (42) (45) Cash Taxes (105) (133) (160) (169) (179) (187) (195) (200) Unlevered FCFF 486$ 519$ 539$ 574$ 607$ 636$ 665$ 681$
Terminal Value Multiple 8.0 x <<< reflects lower growth businessTerminal Value 8,532$ WACC 9.0% <<< 100bps premium over Bloomberg calculated rate
PV (at 12/31/09) 465$ 456$ 434$ 424$ 412$ 396$ 380$ 357$ 4,282$
FCF to Firm 3,324$ Terminal Value 4,282 Enterprise Value 7,606$
Net Debt (2,934) Equity Value 4,672$ Shares Outstanding 138.7 Implied Share Price 34$
Implied EV/2010 EBITDA 10.6 x
Implied Share Price Calculation
Owners of Nalco’s Stock
Ownership Summary Type # Shares Held % of Total Shares Outstanding Market Value (USD in mm)
Institutions 5 116,208,816 84.09 2,657.7Hedge Fund Managers 4,784,170 3.46 109.4Insiders 6,491,213 4.70 148.5Public and Other 3 10,710,389 7.75 245.0Total 138,194,588 100.00 3,160.5
Top Holders Holder # Shares Held % of Total Shares Outstanding Market Value (USD in mm) Position Date
Berkshire Hathaway Inc. 9,000,000 6.51 205.8 Jun-30-2009Shapiro Capital Management LLC 6,034,410 4.37 138.0 Jun-30-2009Morgan Stanley Investment Management 5,050,165 3.65 115.5 Jun-30-2009MSD Capital, L.P. 4,841,204 3.50 110.7 Jun-30-2009The Vanguard Group, Inc. 4,807,602 3.48 109.9 Jun-30-2009
Top 5 shareholders control ~20% of Nalco’s stock
Source: Capital IQ
• Further and prolonged deterioration in the economyNalco’s “stickiness” is limited to a plant (or rig) being operationalDiversified client base (largest customer accounts for < 3% of revenues)
• Sudden increase in raw materials costEquates to ~30% of expenses, with no single component >3.5% of the total
• Inability to pay or refinance ~$500 million of debt maturing in 2011Nalco’s ability to tap the credit markets was evident during Q2 2009, when it successfully refinanced $1.2 billion of debt
• Adverse changes to the US pension legislation could require Nalco to make additional contributions (estimated at ~$200 million)
Pension plan is currently ~ 80% fundedEmployees is legacy pension moved to defined contribution plan
Key Risks to the Investment Thesis
The biggest risk is that the global economy will enter into a prolonged period of negative growth – which will curtail output in sectors that will drive Nalco’s expansion
Though the earth is comprised of 70% water, ~2% is available for residential,industrial, and agricultural use. Of the ~2%, less than 33% is accessible
Water, Water Everywhere… NOT
Source: Jefferies Intl, Unesco, Aquastat, IFPRI
Volume % of % of(M km3) Total Freshwater
Oceans 1,337.928 96.528% 0.000%Icecaps & Glaciers 24.062 1.736% 68.700%Ground water 23.399 1.688% 0.000%
Fresh 10.528 0.760% 30.100%Saline 12.871 0.929% 0.000%
Ground Ice & Permafrost 0.300 0.022% 0.860%Lakes 0.176 0.013% 0.000%
Fresh 0.091 0.007% 0.260%Saline 0.085 0.006% 0.000%
Soil Moisture 0.165 0.012% 0.050%Atmosphere 0.013 0.001% 0.040%Rivers 0.002 0.000% 0.006%Biological Water 0.001 0.000% 0.003%TOTAL 1,386.047 100% 100%Source: USGS
Water Source
Key drivers of increasing water demand:1) Population growth2) Economic development3) Rising affluence
Global Trends in Water Usage: Withdrawals
Global Water Supply
Investments in BRICs+ during the recession will position Nalco to assist industrial clients manage an increasingly constrained resource
Nalco’s Rationale for Investing in BRICs
Source: Nalco Presentation
In developing countries, water treatment costs grow faster than GDP, adding to the already high industrial growth rates – both of which serve as opportunities for Nalco
“MVA” is Manufacturing Value Added
Coal, Oil, Gas & Nuclear to meet Energy Needs
* Includes biomass and waste, and other renewables
Incremental Primary Energy Demand by Fuel Type (2006 to 2030)
Source: IEA World Energy Outlook 2008
“Mtoe” refers to “Mega tonne of oil equivalent”; 1 Mtoe translates to ~12,000 GWh, which represents ~1% of the total power generating capacity in the US today
Cheap Sources of Power Require a lot of Water
Source: California Energy Commission
