The Long and Short
Huntsman looks like a rising star
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The Huntsman Corporation keeps doing the rights things to earn an investment grade rating from the three largest agencies. It has recently refinanced debt and pushed out maturities to complement steady reduction in total debt. With earnings also likely to improve, leverage should keep going down. Huntsman could grab investment grades across the agencies within 12 months, and there is clear upside in its debt.
HUN (Baa3/BB+/BBB-) recently tapped the market with proceeds used to redeem the company’s $400 million notes maturing 11/15/22. The redemption pushed out the company’s nearest debt maturity until 2025 while reducing overall interest costs. Management has demonstrated its commitment to investment grade ratings as it has reduced debt by nearly $800 million since fiscal year-end 2019 with divestiture proceeds, while focusing on restructuring efforts to improve its overall margin profile. While total company leverage is in the realm of investment ratings, 2.6x on a gross basis and 1.7x on a net basis, it is expected to improve as EBITDA is forecasted to grow strongly in 2H21. That said, gross leverage is expected to decline below 2.0x. Additionally, FFO/debt, a key metric used by S&P when determining ratings, should increase above S&P’s 40% requirement. HUN could get rated IG by all three ratings agencies within 12 months. There is further upside in HUN spreads and particularly in HUN 2.95% 2031 bonds given the low dollar price and spread pick-up relative to DOW Chemical (DOW – Baa2/BBB/BBB+). Currently, the spread difference between the two credits in the 10-year part of the curve is close to 50 bp (g-spread). Note that in 5-year CDS, HUN trades nearly 8 bp through DOW.
Exhibit 1. BBB Chemical 7-year-10-year Curve
Source: Bloomberg TRACE; APS
Balance sheet and liquidity are strong
As mentioned above, HUN is currently levered 2.6x on a gross basis and 1.7x on a net basis, which are strong enough credit metrics to garner investment grade ratings at all three rating agencies. When you exclude affiliate debt, HUN’s metrics are even stronger, at 2.0x gross leverage and 1.2x net leverage. HUN’s most recent $400 million debt issuance did not increase leverage as proceeds were used to make-whole its $400 million issue which was set to mature in November 2022. Additionally, liquidity at the end of the quarter stood at $1.9 billion reflecting cash on hand of $673 million and an untapped revolver of $1.2 billion. Liquidity further benefits from solid free cash flow generation. HUN should generate just over $300 million of free cash flow this year, which will more than cover the company’s dividend payments which are expected to total approximately $165 million for the year. HUN has a solid track record of strong and consistent free cash flow conversion which has averaged 42.5% over the past four years and is forecasted to now be 40% for 2021, five percentage points higher than management’s previous expectations.
Exhibit 2. HUN Adjusted Free Cash Flow Conversion (2017-2021F)
(1) Excludes taxes paid on sale of businesses
Source: HUN 1Q21 Earnings Presentation
End-Market Recovery Supports Full-Year Growth
HUN’s first quarter results highlighted sequential volume growth across every business line except for Polyurethanes. However, management noted on the earnings call that quarterly volume decline largely reflected a planned inventory build. Additionally, management noted that they are witnessing positive growth trends in construction and elastomer markets that should continue throughout the year. In Performance Products, volume increased 5% sequentially and management expects to witness volume growth for the year across all of Performance Products’ core markets. Furthermore, pricing growth has been strong and price increases are expected to offset raw material inflation. In Advanced Materials, HUN witnessed volume growth across all core markets except Aerospace. However, management expect trends to continue to improve for the remainder of the year for the Advanced Materials unit, including Aerospace. Lastly Textile Effects saw volumes improve on both a yoy and sequential basis due to improved global demand. HUN has forecasted that Textile Effects will continue to see recovery in core markets, as well as favorable trends in sustainable solutions.
Synergies and cost realignment on track
HUN continues to target $120 million of annualized run rate synergies from recent acquisitions by mid-2023. Management noted that they have now exceeded the $20 million target they set by combining the polyurethane spray foam businesses and creating the Huntsman Building Solutions Platform. With respect to the CVC Thermostat acquisition, which closed 5/18/20, HUN has already achieved an annualized synergy run rate of $9 million and is on target to achieve $15 million by year-end. They also remain expect to hit their $8 million synergy target related to the Gabriel Performance Products acquisition, (completed 1/15/21) by early 2023. This would put HUN on track to achieve its run-rate target of $90 million by year end, with that target to grow by an additional $30 million over the next two years.
On the cost realignment side, HUN continues to make solid progress against its goals. The Polyurethane business has been undergoing the largest makeover and is expected to produce nearly $40 million in run-rate savings by mid-2022. To date, management noted that they have achieved $15 million of those savings. With respect to Advanced Materials, $7 million of management’s $10 million target has already been achieved.
Exhibit 3. HUN Cost Realignment & Synergy Update
Source: HUN 1Q21 Earnings Presentation
EBITDA returning to normalized levels
While management noted that they are “a far cry from all cylinders running”, they did note that all businesses within their portfolio are approaching or have already achieved historical normalized EBITDA levels. The only exceptions to this are the Chinese and European MDI component polymeric cells, which have been seeing higher than normal EBITDA margins, and Aerospace which continues to underperform and is running approximately $50 million shy of normalized levels. HUN expects Aerospace to fully recover over the next few years. That said, management is optimistic that it can produce $1.1 billion of adjusted EBITDA this year, a level not seen since 2018. This would translate to an adjusted EBITDA margin 15.1%, up nearly 600 bp from year end 2020, and up nearly 80 bp from 2018.
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