Brenntag: Buying and selling At A ten% FCF Yield And Pursuing M&A

Introduction

In August 2021, I discussed I was on the sidelines and would be happy to revisit Brenntag (OTCPK:BNTGF) (OTCPK:BNTGY) at a decrease share value. We’re now 15 months later and Brenntag’s share value has dropped from in extra of 86 EUR to only over 60 EUR per share. That’s a 30% drop and means the corporate has clearly underperformed the overall markets as you may see beneath (the blue line is the DAX index, the purple line is the S&P efficiency since my earlier article). And that’s why I believe this could possibly be an excellent time to revisit this Germany-based chemical merchandise distributor.

Brenntag’s major itemizing is in Germany the place it is buying and selling with BNR as ticker symbol on the Deutsche Boerse. The typical each day quantity in Germany is roughly 420,000 shares and that is clearly superior to some other itemizing. As there are 154.5M shares excellent, the present market cap of Brenntag is simply over 9.3B EUR.

The primary 9 months of the 12 months are promising

On this article I’ll have a more in-depth take a look at the monetary efficiency of Brenntag, in addition to how the latest M&A rumors might impression the corporate. For a greater understanding of Brenntag’s enterprise mannequin I’d wish to refer you to this very extensive 73 page corporate presentation which gives a really detailed overview of the corporate and all its elements.

Within the third quarter of this 12 months, Brenntag reported a total revenue of 5.1B EUR, and generated an working revenue of 1.1B EUR on that income. This implies the corporate has been capable of defend its margins because it was capable of preserve its gross margins comparatively secure across the 22% mark.

A few of the different working bills did enhance at a sooner tempo although as as an illustration the personnel bills are 15% greater than within the third quarter of final 12 months however with an working revenue of 377M EUR, the working margin of seven.4% is greater than the 6.6% in Q3 2021, however a bit decrease than the 8.4-8.5% achieved within the first six months of the 12 months.

However with a complete web earnings of 1.60 EUR per share within the third quarter, which introduced the 9M 2022 EPS to five.07 EUR per share, I believe shareholders of Brenntag might (and will) be fairly happy.

Brenntag didn’t present a really detailed This autumn outlook nevertheless it did affirm it expects a full-year working EBITDA of 1.75-1.85B EUR. The working EBITDA within the first 9 months of the 12 months was 1.46B EUR which implies the This autumn EBITDA will seemingly are available at round 300-400M EUR. This confirms the corporate’s remark the inflationary headwinds will persist within the close to future.

The implied This autumn EBITDA steering now additionally permits us to calculate the anticipated full-year free money circulate. We all know the corporate reported an working money circulate of 554M EUR within the first 9 months of this 12 months, however this features a 648M EUR funding within the working capital place and excludes 99M EUR in lease funds and nearly 3M EUR in funds to non-controlling shareholders. On an adjusted foundation, the working money circulate was precisely 1B EUR within the first 9 months of the 12 months.

The entire capex was 149M EUR, leading to an adjusted free money circulate of roughly 850M EUR within the first 9 months of the 12 months. That’s a powerful consequence, however be mindful the ultimate quarter of the 12 months might be capex-heavy as Brenntag has been guiding for a full-year capex of 270M EUR, indicating the This autumn capex might be round 120M EUR.

Let’s now assume the This autumn EBITDA might be 350M EUR. We all know the depreciation bills might be round 95M EUR and the curiosity bills might be round 25M EUR. This could end in a pre-tax earnings of 230M EUR and a web earnings of 169M EUR based mostly on a mean tax charge of 26.5%.

We additionally know the 120M EUR capex + 25M EUR in lease bills are about 50M EUR greater than the mixed depreciation and amortization bills. This implies the This autumn free money circulate consequence might be roughly 50MM EUR decrease than the reported web earnings, and 110-120M EUR can be a stable and dependable This autumn free money circulate consequence. This could convey the full-year free money circulate consequence to 950M EUR, for simply over 6 EUR per share. And that makes the present share value of simply over 60 EUR fairly enticing.

Brenntag is pursuing M&A

The chemical distribution sector continues to be fairly fragmented and it is ripe for extra M&A. On the finish of November, Brenntag confirmed it was speaking to Univar Options (NYSE:UNVR), a US-based competitor to discuss an acquisition of the latter. No additional particulars have been offered but, however a Credit score Suisse (CS) analyst mentioned a $40/share acquisition can be cheap. I are inclined to agree.

Univar generated a free cash flow result of in excess of $550M within the first 9 months of the 12 months, and the valuation of roughly 9 instances EBITDA based mostly on the aforementioned $40/share would symbolize an enterprise worth of just below $9B. That’s not low cost, however there absolutely might be synergy advantages that could possibly be unlocked if two main gamers would merge.

Brenntag additionally would be capable of pursue this M&A take care of an all-cash bid. At $40/share, it must fork over $6.5B in money and assume about $2.2B in web debt. This could enhance its personal web debt place from about $2B to $10.7B or roughly 10.2-10.3B EUR. Assuming the mixed entities will hoard money in 2023 and can be capable of cut back their web debt by 1.2B EUR on a mixed foundation, the YE 2023 web debt can be ‘simply’ 9.5B EUR. That’s very excessive in absolute numbers, however we additionally know the mixed EBITDA (excluding synergy advantages) would exceed 2.5B EUR. The debt ratio would thus are available beneath 4 instances EBITDA by the top of subsequent 12 months and additional drop to lower than 3 by the top of 2024 if/when the synergy advantages kick in. That is only a theoretical calculation, however the numbers point out it needs to be doable.

Whereas it’s nonetheless early days and there’s no assure a proposal will materialize, I believe the mixture of each firms would make sense from enterprise perspective and a monetary perspective.

Funding thesis

Brenntag’s present market cap of 9.3B EUR and enterprise worth of 11.2B EUR (excluding lease debt) makes the corporate fairly attractively valued at simply 6.5 instances this 12 months’s EBITDA (excluding lease amortizations). I’d not oppose a transaction with Univar, even when that will occur at $40/share as I believe the mixed entity can be fairly robust.

I at the moment don’t have any place in Brenntag, however I’m getting more and more now the share value has dropped by about 30% since my earlier article.