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It is time to take Barely detour after primarily converse abouting dividends this month. On this case, We’ll converse about AdvanSix Inc. (NYSE:ASIX), a small-cap chemical supplier based mostly in New Jersey. In 2020, I started researching The agency For private consumers as a Outcome of of its agriculture publicity, which I am going to converse about in This textual content material. The set off was by no means pulled as a Outcome of we found A greater agriculture-focused various. But, the inventory accelperiodted from Decrease than $10 to presently Greater than $45. Now, I am going to revisit the inventory and provoke safety for The primary time on Looking for Alpha Since the agency Continues to be method too Low price and An monumental beneficiary from re-shoring and sky-extreme chemical margins.
Now, The agency has an extremely healthful stability sheet, a extreme free money circulate yield, rebounding EBITDA, and a strong enterprise mannequin To current sustainable income.
AdvanSix, Small However Important
Let’s start with The fundamentals. What does AdvanSix do? Based in Parsippany, New Jersey, AdvanSix is a supplier of chemical merchandise with a $1.31 billion market cap.
The agency started buying and promoting in late-2016 when it turned an unbiased agency. In 2016, AdvanSix was spun off from industrial huge Honeyproperly Worldwide (HON). I guess that some people studying this are Honeyproperly shareholders who acquired shares in 2016.
ASIX genperiodtes is gross sales in 4 enterprise parts, none of which launched in Decrease than 19% of complete gross sales in 2021. The agency produces nylon, caprolactam (used Inside the manufacturing of nylon), chemical intime periodediates used Inside the manufacturing of adhesives, paints, coatings, and completely differents, As properly as to ammonium sulfate, used as fertilizer, an herbicide, and for a quantity of industrial purposes.
Particularly Inside these events of damaged current chains And agencys that transfer amethod from China (re-shoring) – which I defined in This textual content material (I like to advocate You are taking A look) – It is An limitless revenue that ASIX has three US-based mostly factories.
Not solely does The agency produce its merchandise in America, but Furtherextra It’s environment nicely using its personal current chain To current its personal wants. For event, the phenol it produces Inside the Frankford Plant is (halfially) Utilized in its Hopeproperly Plant, which produces merchandise That are additionally Utilized in its Chesterfield Plant.
To cite The agency:
Our assembleed-in manufacturing course of, scale and The quantity and differ of our merchandise make us A pair of of the reliable and environment nice producers in our enterprise. We persistently Confacetr and Pay money for enhancing manufacturing yields from our numerous manufacturing course ofes To assemble on our main value place. Our international logistics infrastructure permits a reliable intra-plant current chain and fixed and well timed shipy to our clients.
Furtherextra, whereas solely 18% of 2021 gross sales have been non-USA incomes, The agency sees itself placeed to service rising export demand Beset off of its freight and logistics capabilities and time periodinal places.
Furtherextra, and That Can be very fascinating, The agency competes with corporations like BASF Corp. and LANXESS, two German chemical powerhouses. These two corporations – like all European producers – are presently Affected by sky-extreme power prices. Even when Russia refrains from shutting off pure gasoline exports, ASIX Might have a revenue in sure merchandise (greater export demand) Beset off of lower enter prices (comparatively talking).
Tons Worth In ASIX
In completely different phrases, ASIX advantages from re-shoring of current chains (prolonged-time period), extreme submit-COVID demand for chemical compounds, struggling rivals overseas Beset off of extreme power prices, And extremely effective agriculture demand for its ammonium sulfate merchandise.
In consequence, The agency is doing very properly financially talking. Final yr, The agency did $1.7 billion in gross sales, which allowed ASIX to do $255 million in EBITDA and $162 million in free money circulate.
In 1Q22, The agency grew its gross sales by 27% As in contrast with A strong 1Q21. This efficiency was Brought on by 29% greater gross sales prices, 2% greater gross sales Beset off of M&A, and 4% lower quantitys. In completely different phrases, strong pricing revenueed this chemical agency.
EBITDA surged by 79%. Based on The agency:
EBITDA enhance pushed primarily by enhanced market-based mostly pricing, internet of enhanced uncooked supplies prices, notably pure gasoline and sulfur, halfially offset by greater utilities value pushed by pure gasoline prices, and lower gross sales quantity.
The EBITDA bridge under reveals how extremely effective ASIX is When it Includes using its pricing power:
The graphs under current why ammonium sulfate Became such An monumental tailwind. Between January 2021 and April 2022, prices of Corn Belt ammonium sulfate have risen from roughly $1,000 per ton (nitrogen content material basis) to virtually $3,600.
Thanks to this bull market, the sale of ammonium sulfate accounts for Greater than 30% of complete agency gross sales and Greater than 50% of complete gross sales quantity. 75% of The agency’s gross sales are home gross sales.
On this case, The agency advantages from Pretty a few tailwinds That are agriculture tailwinds Usually. Global crop current is beneath strain Beset off of low inventories, extreme fertilizer prices (Brought on by extreme power prices), The proceedd wrestle in Ukraine, extreme demand, and constrained logistics. ASIX advantages from all Of these tendencies Beset off it is a home producer with comparatively brief current chains, and The power to ship extra Than merely fertilizer.
As the TIKR graph above reveals, The agency goals to genperiodte Shut to $400 million in EBITDA in 2022. This Is predicted To return with $215 million in free money circulate based mostly on Shut to $99 in capital expenditures. Notice that free money circulate Is working money circulate minus capital expenditures. It’s money An group can use to distribute a dividend, rebuy shares, or enhance stability sheet well being.
$215 million in anticipated free money circulate interprets to a 16% free money circulate yield using The agency’s $1.31 billion market cap. In completely different phrases, if The agency needed, it might pay a 16% dividend or buy again 16% of its shares.
A 16% dividend yield Isn’t occurring, However it reveals how extremely effective The agency’s funds have Discover your self to be. On November 5, 2021, The agency provoked a $0.125 quarterly dividend. This interprets to $0.50 per share per yr. That is a 1.07% yield using The current inventory worth. While There’s room to hike the dividend, This is not Alleged to be a dividend-focused article.
What I care most about is what The agency spends extra money on. In 1Q22, The agency acquired U.S. Amines, A quantity one North American producer of extreme-value intime periodediates Utilized in agrochemical compounds, prescription medicine, and completely different purposes for An complete worth of $98 million. The agency additionally rebuyd Greater than 181 thousand shares for $38.6 billion.
It’s unbelievable to see that The agency is now using the commodity bull market To reinforce its enterprise, buying for again shares, and initiating a dividend. Furtherextra, internet debt Is predicted to be adverse in 2023 (Further money than gross debt) as free money circulate is Greater than probably greater than any buyagain or acquisition plans.
Befacets that adverse internet debt Is candy information Usually, The agency will enter The subsequent financial dpersonalturn in its enterprise – wheby no means That Can be – with a a lot extra healthful stability sheet, Which may scale again dpersonalfacet hazard.
Furtherextra, it makes the valuation so a lot juicier.
ASIX has a $1.31 billion market cap. 2022 internet debt Is predicted to be $65 million. The agency additionally has Shut to $20 million in pension-associated liabilities. All of This currents The agency an enterprise value of $1,395 million.
This currents us an EV/EBITDA a quantity of Of three.5x using 2022E EBITDA of $400 million and 4.0x using 2023E EBITDA of $350 million. The decline Is predicted as a Outcome of analysts Do not confacetr that the sky-extreme margin environment will last.
Knowledge by YCharts
While It is exhausting To decide a “goal” a quantity of, I might make the case that An group like ASIX Ought to not commerce under 6.0x EBITDA. This Is in a place to give us a “truthful” value of $2.1 billion using 2023 estimates. In completely different phrases, if The agency Is In a place to proceed extreme EBITDA period after margins come dpersonal a bit Getting into 2023, it Could be buying and promoting at $75 per share.
Usually, I name this “Takeamethod”. But, in this case, I even Want to share my thoughts a bit extra. What we’re Dealing with This is a small-cap agency that has Much extra potential than the market is giving it credit rating for. The Honeyproperly spin-off ASIX has Discover your self to be An group with a terrific place Inside the North American chemical current chain. After a devastating dpersonaltrend guessween 2018 and 2020 periodsed most of its market cap, The agency is now lastly In a place That permits it to periodse its internet debt, buy new corporations to enhance its enterprise mannequin, and distribute money using dividends and buyagains.
Proper now, The agency advantages from regular chemical demand (ex-agriculture), sky-extreme margins in its agriculture half, strong free money circulate, falling debt, and A assembleive valuation.
While I give The agency a extreme truthful value, That is By no means a name to go obese ASIX. I’ve 95% of my money invested in dividend progress shares and my primary goal is To debate prolonged-time period funding alternatives. Trading alternatives should On A daily basis be seen as a “bonus” on the facet. If I buy ASIX, It Goes to be A very small place. It additionally Signifies That Ought to You are not a commercer, don’t start now. Only buy ASIX Everytime You’ve a buying and promoting portfolio and Do You’d like to’re Looking for publicity Inside the enterprise.
In any case, ASIX reprimarys a margin play. While I do anticipate An prolonged-time period uptrend Beset off of current chain re-shoring after the pandemic, that uptrend will probably be very risky. Between 2018 and 2020, The agency misplaced roughly 80% of its market cap Beset off of lower demand and lower margins. A low-margin environment can Get back Finally. While The agency is now in a Tons greater place Beset off of a extra healthful stability sheet, It’s going to Greater than probably set off damage as quickly as extra.
Furtherextra, earlier this yr, the inventory briefly dropped under $35. It rebounded, However it goes To level out What Sort of volatility buyers Shall be uncovered to.
So, prolonged story brief, I am bullish on ASIX. The agency is in An excellent spot, And that i like what administration is doing with The agency. If You’d like To buy it as a commerce, Try and get in as Shut to $40 as potential. At That time, the mid-time period hazard/rewrestled Is primarily good.
(Dis)agree? Let me know Inside the feedagain!