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Axiall Corp Is A Rare Opportunity: A Look at the Restructuring

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I recently wrote a piece about Axiall Corp (NYSE:AXLL) and how the company was undervalued, as investors were focusing too much on the company’s small loss during the first quarter of this year and the market was placing no value on the synergies that the company had gained from its merger with PPG Industries, Inc. (NYSE:PPG)’ chemicals business.

Axiall Corp Is A Rare Opportunity: A Look at the Restructuring

Axiall’s merger is set to provide some good long-term earnings synergies, indeed, it has already started contributing to revenues. However, around the same time as the merger was completed, Axiall Corp (NYSE:AXLL) took a charge relating to the restructuring of its own debt, and as a result, the company reported a loss of $3.5 million during the first quarter, compared to a profit of $35.3 million for the same period last year.

Axiall Debt Restructuring May Benefit Long Term

However, what some investors failed to notice was that during the same period, Axiall’s revenue expanded 23% and gross income expanded 57% year-on-year, thanks to the synergies already gained from the acquisition, despite only contributing to earnings for two out of the three months the first quarter results covered.

As I have mentioned above, one of the facts that investors are missing about Axiall Corp (NYSE:AXLL) is the company’s debt restructuring, which will actually benefit the company in the long term. Debt restructuring costs threw the company into a loss for the first quarter of the year but the restructuring has put Axiall Corp (NYSE:AXLL) in a better long-term financial position. The company used its $200 million in cash generated from operations during the last three quarters of 2012 along with a new issue of $450 million in 4.875% unsecured senior notes due 2023, to undertake a tender offer to buy back $450 million of 9% senior secured notes. Axiall paid roughly $1,100 for every $1,000 of debt and this was the cause of the company’s one-off charge that distorted net income.

A Closer Look At Axiall

Furthermore, after discounting the one-off charge that this activity incurred, and adding back in the company’s $200 million change to working capital, which was used to assist in the restructuring, Axiall Corp (NYSE:AXLL) would have reported a positive net change in cash of $90 million for the first quarter — the company reported a positive cash inflow of $85 million during Q4 2012 and for the past three years, Axiall has reported an average free cash flow of $130 million a year.

Moreover, if Axiall Corp (NYSE:AXLL) does continue to achieve this level of cash inflow, then the company will be set to generate around $90-$100 million cash per quarter, which on an annualized basis, works out to a 14% return on tangible assets and a 17% return on equity – in comparison, peers The Dow Chemical Company (NYSE:DOW) and E I Du Pont De Nemours And Co (NYSE:DD) produce a return on tangible assets of  only 2% and 6% respectively.

Additionally, Axiall’s building materials division should benefit from the resurgence in housing activity over the last quarter and this should boost overall profitability.

Axiall Is A Rare Opportunity

Overall, Axiall’s recent sell-off provides value investors with a rare opportunity. Axiall Corp (NYSE:AXLL) is a highly cash generative company that is achieving an above average return on assets and equity, and what’s more, Axiall is cheaper than its larger peers, trading at a price-to-sales ratio of 0.7 and a forward P/E ratio of 8.5 compared to its ten largest peers, which trade at an average price-to-sales ratio of 1.8 and a forward P/E ratio of 13.2. Axiall also trades at a P/B ratio of 1.1 with a net asset value of $40 per share.

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