Analysis: Market unsure of synergy of PTTGC’s €4-billion acquisition

State-owned PTT Global Chemical Plc (PTTGC) shares continued to fluctuate as investors remained skeptical of a recently announced acquisition that would cost the company close to 5 billion US dollars.

PTTGC, which was until recently run by incumbent Energy Minister Supattanapong Punmeechaow, on July 12 said it was acquiring Allnex Holding GmbH, a Germany-based specialty coating chemical business.

The acquisition of Allnex will see PTTGC dish out nearly 149 billion baht. PTTGC would also provide a short-term loan to Allnex of 450 million dollars. This deal, which is valued at around 4 billion euros, is the single largest international acquisition to date by a state-owned company.

The transaction also happens within nine months after former chief executive Supattanapong took helm of the ministry under which PTTGC is categorized.

Analysts have also called into question PTTGC’s track record and the synergy of such an acquisition.

“We believe there should be limited synergy to be created given both are in different segments,” Komsun Suksumrun, analyst at Phatra Securities noted in a report to clients.

Komsun was not alone in pointing to a lack of synergy, Naphat Chantaraserekul, analyst at Krungsri Securities said that the “poor” track record of PTTGC in executing and creating synergy from its various mergers and acquisitions is another hindrance to PTTGC’s big bet.

Naphat did not say which of PTTGC mergers or acquisition has gone sour but did mention the valuation paid to the private equity by PTTGC to acquire Allnex.

“Based on Allnex’s reported net profit of 88 million euros in the last 12 months, its profit contribution (after interest expense) to PTTGC would be 1.5 billion baht or 5 per cent more than our 2022 earnings forecast, which is relatively small for this transaction size,” he said in a note to clients.

Naphat has a hold on the shares of PTTGC with target price of 64 baht a piece.

Shares of PTTGC were trading at 56.75 baht in the afternoon session today, after dipping 6.4 per cent on the day of the announcement but regaining some of the lost ground yesterday with a 5.9-per cent rise. Shares of PTTGC were trading at 58.50 baht prior to the announcement on Monday.

Komsun of Phatra gives the stock a ‘buy’ rating with a 12-month target price of 82.40 baht.

Diversification

PTTGC has claimed that the move to buy Allnex is part of its move to diversify its dependence on commodity chemical business, which accounts for 90 per cent of its overall revenue stream. With a possible downturn in the oil commodities likely in the next few years, a diversified PTTGC (similar to the moves by Indorama Ventures Plc – IVL, a few years ago), would mean that the revenue stream would remain strong while margins would be higher. PTTGC’s strategy is to increase its share of performance chemicals from 10 per cent in 2020 to 25 per cent by 2030.

Allnex has generated sales of 1.9 billion euros for the last 12 months (ended 1Q21) with adjusted EBITDA of 328 million euros and net profit after tax of 88 million euros. PTTGC stated it expects 2021 EBITDA to improve to 400 million euros and net profit after taxes 100 million euros.

“This would imply a transaction 2021 EV/EBITDA at 9.8x, based on PTTGC’s forecast announced during the analyst meeting,” Phatra’s Komsan said.

He added that PTTGC cited that a previous coatings acquisition deal was done at 12x EV/EBITDA while Allnex’s peers Covestro and Arkema are on 5.7x and 7.6x 2022E EV/EBITDA respectively.

“This would put the transaction value potentially at the top end of the 5.7-12x EV/EBIDTA range,” Komsan said, echoing what Napat of Krungsri said.

Although the market has been reacting to possible cash call via capital raising, these plans have been denied and PTTGC has said that it would fund the acquisition via its cash on hand of 100 billion baht (which earned interest of around 1 per cent) at end-1Q21,  and by proceeds of 23 billion baht from the recent partial divestment of its Global Power Synergy (GSPC) stake. It would also seek loans from PTT of 74 billion baht.

Market leader in industrial coating

Allnex is a global leader in industrial coating resins with a total of 23 technology centres and 34 manufacturing facilities globally, supporting total production capacity of 1.25 million metric tonnes per annum. In 2020, 40 per cent of its revenue was from the European region, 36 per cent from Asia Pacific, and 24 per cent from the Americas.

Wattana Punyawattanakul, analyst at Tisco Securities, says that the key demand segments for Allnex are industrial metal (27 per cent), automotive (19 per cent), packaging (11 per cent), industrial wood (8 per cent), and decorative (7 per cent).

Allnex completed the acquisition of its competitor Nuplex in 2016.

He said that the size of the industrial coating resin market is estimated at 17 billion dollars as of 2020, or equivalently 58 per cent of the global coating resins industry (decorative coating resins account for 42 per cent). The industry is fragmented with the largest player holding less than 10 per cent of market share.

“We would not be surprised to see the market raise a few concerns on this announcement. First, it’s a hefty investment in a relatively new area for PTTGC (as well as for the investment community). Second, while it’s true that the industrial coating market appears more stable compared to basic chemicals, we see potential market concern that industrial coating has already peaked as pent-up demand subsides and the manufacturing sector takes a back seat to the service sector. Lastly, the investment could add stress to the balance sheet (especially if the chemical industry does indeed enter a downturn),” he said in a note to clients.

Despite this Wattana of Tisco has a ‘buy’ rating on PTTGC with an unchanged target price of 79 baht a share.

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