Axiall: Ignore The NI, Look At The Other Valuation Metrics

Axiall: Ignore The NI, Look At The Other Valuation Metrics

Valued at only $2.5 billion, Axiall Corp (NYSE:AXLL) would not make the cut for most investors who are looking for value in the chemicals sector. Indeed, industry behemoths DuPont and Dow Chemical both currently trade at attractive forward valuations relative to the rest of the sector. However, Axiall has recently doubled in size and now has several strengths that the market has failed to note. After a 30 percent decline from its 52-week high in March, the company currently appears to be on special offer.

Axiall: Ignore The NI, Look At The Other Valuation Metrics

Axiall manufactures and internationally markets chlorovinyls and aromatics—including a number of key ingredients that are used in a range of everyday plastics, such as PVC.

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In addition, the company has a vertically integrated building products manufacturing and distribution chain through its subsidiary, Royal Building Products.  Around 47 percent of Axiall’s sales are linked directly to the housing industry and another 20 percent are indirectly linked, which puts Axiall Corp (NYSE:AXLL) in a prime position to benefit from the current U.S. housing boom.

Axiall Corp (NYSE:AXLL)’s weak share price stems back to earlier this year, when Axiall merged with PPG Industries, Inc. (NYSE:PPG)’s chemicals business, which was immediately beneficial to earnings. However, this did not show through into the company’s first quarter results as Axiall reported a $100 million charge relative to the value of its own debt, wiping out any profits and benefits from the acquisition.

The company also suffered during the first quarter due to rising input prices and unplanned outages, and fires at some of its production facilities. That said, these factors were almost non-existent compared to the debt write-down.

Axiall Looks Good For Value Investors

Now, after a 30 percent decline in share price, the company looks to have any bad news priced in and value investors should start taking note. Why? Well first off, the company is attractively valued and currently trades at a forward EV/EBITDA multiple of 4.5x compared to its five year historic average of 6.6x. In comparison, the company’s peers in the plastic materials sector trade at an EV/EBITDA average forward multiple of 7.6 x. It would appear that the company does not deserve this 40 percent valuation discount to sector peers.

Secondly, the company is set to grow revenue by around 43 percent this year after the acquisition, which puts the company on a staggeringly low forward EV/Revenue figure of 0.7x—the sector average is around 1.7x. Meanwhile, gross margins are set to expand 200bps to 18.5 percent and net profit is predicted to rise 124 percent to $269 million as net margins roughly double—a strong rate of growth and improving cash flow should allow the company to rapidly pay down debt.

Thirdly, at the end of the first quarter, after the company completed the PPG acquisition, Axiall’s balance sheet highlighted a strong financial position. Axiall’s current ratio stood at 2.1, while its quick ratio came in slightly lower at 1.3. Debt stood at $1.58 billion, 2x EBITDA and interest costs are easily covered 4.4x by EBIT.

Fourth, at the end of the first quarter, before unusual expenses, Axiall Corp (NYSE:AXLL) reported EBITDA of $126 million, up 26 percent from the $100 million reported in the fourth quarter of 2012, highlighting the earnings synergies already stemming from the PPG Industries, Inc. (NYSE:PPG) acquisition. Moreover, the company’s first quarter earnings presentation highlights that on an adjusted basis, net income for the first quarter was $45.1 million, compared to $27.6 million in the same period last year. The company is forecast to earn $1.24 per share for the quarter and $4.36 per share for the full year 2013; a year-on-year growth rate of 12 percent.

Axiall Poised to Benefit from Housing Boom

Lastly, Axiall Corp (NYSE:AXLL) is extremely cash generative and the company, for the last three years, has turned approximately 50 percent of EBITDA into free cash flow.

Unfortunately, Axiall does not offer shareholders much in the way of income. The company recently started offering shareholders a small quarterly payout of $0.08, or $0.32 annually for a yield of 0.7 percent. However, this token payout only cost the company a total of $8.3 million for 2012, a sum easily covered almost 17 times by free cash flow, indicating that there is plenty of room for payout growth.

Overall, after its recent pull-back, Axiall Corp (NYSE:AXLL) looks very attractive. The company’s recent acquisition is set to boost earnings this year and exposure to the buildings trade should allow the company to benefit from the housing boom, while the rising number of durable goods sold should increase demand for the company’s plastic additives. Moreover, the company appears undervalued in comparison to its peers, is highly cash generative with a wide profit margin, and has a strong balance sheet.

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