Kemira Stock: Trading At A Double-Digit FCF Yield And Less Than 7X EBITDA

I primarily appreciated Kemira (OTCPK:KOYJF) for its comparatively defensive traits as this specialty chemical substances firm could be very lively within the water therapy business. I wasn’t anticipating a lot from 2022 as the corporate was initially guiding for a comparatively flat efficiency and I assumed that might already be achievement given the inflation-related value strain so many different firms are experiencing today. I’ve to confess I used to be very pleasantly stunned with Kemira’s Q2 and H1 monetary efficiency which now even features a steerage improve.

Kemira has its foremost itemizing on the Helsinki Stock Exchange the place it’s buying and selling with KEMIRA as ticker symbol. The common each day quantity in Finland exceeds 130,000 shares per day, making it essentially the most liquid venue to trade within the firm’s shares. As there at present are 153.4M shares excellent, the present market capitalization is sort of 1.9B EUR. Kemira pays a 0.58 EUR dividend for a yield of just about 5% however because the Finnish dividend withholding tax is 35%, I don’t suppose the dividend ought to be a foremost consideration for non-Finnish traders except it’s straightforward sufficient to reclaim the international taxes.

A chief within the water therapy sector

Kemira is working in a distinct segment market as its chemical substances serve its prospects trying to enhance product high quality. About 60% of the income is generated within the ‘pulp & paper’ division whereas ‘industry & water’ accounts for the rest of the income (which totaled 2.7B EUR in 2021).

I’m notably within the business & water division as not solely does this have the very best progress views (with a mid-single digit CAGR the subsequent few years), it additionally strongly improves the ESG profile of the corporate:

And Kemira doesn’t simply present companies to non-public companies. About 40% of its income comes from municipalities, and several other massive cities (together with Los Angeles, Montreal and New York) are utilizing Kemira’s merchandise to deal with town’s water assets and waste water.

The demand for its water therapy merchandise will clearly develop together with a rise of the world inhabitants. More cities and native authorities are allocating larger budgets to treating water and guaranteeing a sustainable water provide and Kemira ought to have the ability to profit from this.

The monetary efficiency within the first half exceeded my expectations

In the primary half of the 12 months, the total revenue of Kemira came in at 1.63B EUR, a really spectacular 30% improve in comparison with the primary half of final 12 months. The working bills elevated at a barely sooner tempo however the firm was nonetheless capable of report an EBITDA of just below 237M EUR. That’s greater than 20% larger than the 194M EUR EBITDA within the first half of final 12 months.

The robust H1 efficiency is totally because of the very strong efficiency within the second quarter as Kemira reported an EBITDA of in extra of 123M EUR leading to a internet revenue attributable to the shareholders of the corporate totaling 45M EUR for an EPS of 0.29 EUR. This introduced the H1 EPS to 0.56 EUR which is sort of 40% larger than in the identical interval final 12 months. Or to make it sound much more spectacular: the H1 2022 earnings already signify about 80% of the earnings of the complete 12 months 2021.

The robust efficiency within the second quarter was driven by the pulp & paper division the place the income and EBITDA reached the very best degree ever because of the relatively straightforward absorption of worth hikes by the shoppers. Kemira has been actively decreasing the common size of the contracts with its foremost shoppers to have the ability to re-price contracts sooner than earlier than. The larger income and EBITDA are much more spectacular when you recognize the corporate exited its Russia operations whereas there was a strike at a serious Finland-based buyer as properly.

Whereas the margins remained strong within the pulp & paper division, the corporate was hit more durable by inflationary issues within the business and water division because the oil and fuel sector nonetheless isn’t again to the degrees it used to run at, which made it tougher for Kemira to hike costs and shield its margins.

The money circulate efficiency is much more spectacular whenever you dissect the Q2 and H1 outcomes. Looking on the first half of the 12 months, Kemira reported an working money circulate of simply 30.6M EUR. Very disappointing at first sight, however take into accout this contains 166.2M EUR invested in sure working capital components. Looking on the stability sheet you may for example see a listing build-up from 352M EUR as of the top of final 12 months to nearly 491M EUR as of the top of June. As this nonetheless represents simply over 6 weeks of income I’m not anxious about this build-up.

So on an adjusted foundation, the working money circulate was truly 197M EUR excluding adjustments within the working capital. But we aren’t there but.

We see the corporate paid about 18.2M EUR in taxes though it owed in extra of 25M EUR based mostly on the H1 consequence. Additionally, we have to deduct 17M EUR in lease funds. After making these changes, the adjusted working money circulate was 163M EUR. Still an enormous enchancment in comparison with the 140M EUR in H1 2021.

The complete capex was 65M EUR in H1 2022, leading to a free money circulate of 98M EUR or round 64 cents per share. Great, however take into accout you can not extrapolate this to finish up with the full-year consequence. Yes, the H2 working money circulate tends to be stronger than in H1 but additionally take into accout the second semester can be notably capex-heavy as about 2/3^rd of the full-year capex is spent within the second semester.

This doesn’t imply I count on the H2 FCF to lower by a double digit share as the upper working money circulate will mitigate the impression of the upper capex. And take into accout the entire capex contains progress capex and sustaining capex.

In reality, trying on the breakdown under, of the 65M EUR in capital expenditures within the first half of the 12 months, only 32M EUR was classified as sustaining capex whereas about 19M EUR was enchancment capex. This implies that 14M EUR or in extra of 20% of the capex invoice was invested in progress.

And as you may see under, the maintenance + improvement capex has historically been round 100-120M EUR per 12 months apart from 2021.

So even when I’d use final 12 months’s non-growth capex of round 143M EUR (which reached the very best degree ever), the common quarterly non-growth capex can be round 35-36M EUR which isn’t that a lot larger than the entire H1 capex we simply used to calculate the free money circulate.

For this 12 months, Kemira expects to spend 6% of its income on capital expenditures so if the costs stay robust, we’ll possible see a 200M EUR capex invoice of which round 130-150M EUR shall be sustaining + enchancment capex.

Thanks to the robust outcomes and the operative EBITDA of 242M EUR in H1, the corporate is now guiding for an EBITDA improve above the 425M EUR generated final 12 months. Hardly a shock contemplating the H1 operative EBITDA already elevated by nearly 15% in comparison with the primary half of final 12 months.

The visibility stays comparatively poor so it’s comprehensible Kemira doesn’t wish to hike its steerage by an excessive amount of however take into accout it now solely wants an operative EBITDA of simply over 183M EUR in H2 2022 to beat the 2021 EBITDA. Meanwhile the H2 2021 operative EBITDA was roughly 213M EUR so even when the H2 efficiency stays flat on a YoY foundation, the full-year operative EBITDA will soar to 455M EUR.

For simplicity sake, let’s use 440M EUR, which might be the midpoint. We know the depreciation bills are about 210M EUR per 12 months whereas the finance prices shall be round 32-35M EUR. This ends in a pre-tax revenue of 195M EUR and a internet revenue of round 0.95 EUR per share (be aware, I count on the corporate to carry out a bit higher in H2 so the 0.95 EUR EPS can be the decrease finish of my expectations).

We additionally know the capex shall be round 200M EUR of which about 150M EUR shall be sustaining capex and enchancment capex. This means the free money circulate consequence will possible are available in at about 50-60M above the web revenue and add about 40 cents per share to finish up with a free money circulate per share of round 1.25-1.35 EUR on a sustaining foundation (so together with sustaining and enchancment capex however excluding progress capex).

Investment thesis

And that makes Kemira nonetheless very interesting. At this second the pulp and paper division is boosting the monetary efficiency and that’s tremendous with me: it supplies the money circulate to proceed to put money into progress whereas the water therapy division can discover its second wind.

As of the top of June, Kemira’s stability sheet contained 147M EUR in money and round 1.1B EUR in liabilities. With an EBITDA of round 450M EUR, the debt ratio will nonetheless be simply round 2.5 (and take into accout the corporate has been investing in its working capital place which drains the money place. This additionally means Kemira is buying and selling at nearly 6.6 instances its EBITDA making use of a 450M EUR EBITDA and never taking any internet debt discount by the top of this 12 months into account.

I feel the mix of a double digit sustaining free money circulate yield (10-11%) and the EBITDA a number of of lower than 7 make Kemira a lovely candidate to build up.

I’ve a protracted place in Kemira and though I wasn’t planning on including, maybe I ought to rethink this thought because the share worth has been comparatively resilient.