The Friday Findings – June 9th 2017

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The Friday Findings – June 9th 2017

Thought for the week: Elliot – Doubling down and Not Giving Upon Akzo – It Worked for Trian With DuPont (not what the then DuPont CEO was expecting)

  • Akzo – Over Yet?
  • Braskem – Worth A Look? Depends on your Stomach for Country Risk
  • Qatar – Should the Polyethylene Market be concerned?

Relevant research

Akzo – Arrogance and Optimism – Likely To Hurt EVERY Stakeholder

Akzo/PPG – Maybe The Devil is in the Details

Making Money in Ethylene – Much Harder Than It Looks

LYB, WLK; A Risk to the Upside – Qatar

Akzo – Over Yet?

Elliot stepping up its stake in Akzo is a surprise to us. Given the failures in the Dutch court and PPG’s decisions not to pursue, there must have been a lot of internal debate regarding whether to throw in the towel or not. The decision to keep going must come with a plan. We have no idea what it might be but we would focus on what happened at DuPont after Trian lost the shareholder vote. Trian stayed the course and used further company miss-steps as leverage to pressure the board. This ultimately resulted in the Board removing the CEO – leading to a fresh look at the company and the ultimately the merger with Dow.

Trian had other shareholders on its side and these shareholders helped pressure the lead director at DuPont as well as other directors, including Ed Breen (now CEO). The Akzo Board is clearly hostile to shareholders, despite recent outreach from the company and Elliot will likely need to find a lot of friends to make headway. We would look for evidence that other activists are taking positions or that current shareholders are still pressuring the company for change before we became more enthusiastic – for now we see some downside in AKZA and it sits on our concerns list.

Braskem – Worth A Look? Depends on your Stomach for Country Risk

News that Petrobras is selling its 36% stake in Braskem ha shone a light on the company this week. While it is unlikely that this stake will increase the public float, a private sale being more likely, it is possible that a US player might be interested, especially if Braskem’s other large holder Odebrecht could also be persuaded to sell. Some of the cross ownerships in Brazil may have likely contributed to some of the country’s bribery scandals involving all three companies and a fresh start with a new owner might be the right move for Braskem.

The currency is cheap and the stock is cheap and it is possible that US companies would look at Braskem, particularly if they felt they could get a controlling stake and run the business as an integrated part of a larger concern. Braskem has around 5 million tons of ethylene capacity and in the chart below we look at EV/metric ton of ethylene capacity to give a measure of relative value. Braskem looks a lot cheaper than the US names on this basis

Part of the reason for the attractive value is the political and economic climate in Brazil and part is the limited float and unusual ownership structure. This might be an off-piste and unexpected move for someone like Lyondell, but it might well be value accretive very quickly and LYB could likely integrate and improve operations significantly. Despite the unpredictability of the currency and economy – Praxair’s LATAM business, which is largely Brazil, is the highest margin business in the portfolio and has been that way for many years.

Qatar – Should The Polyethylene Market be Concerned?

The political isolation of Qatar by its neighbors continues and at the margin – Turkey sending military aid – things are getting worse rather than better. In 2015 Qatar exported $2.26 billion of polyethylene – and if we assume that the product was sold at $1200 per ton that fits with capacity close to 2 million tons. In 2015, according to OEC 27% of the exports went to China – roughly 500,000 tons; and 14% to India – roughly 280,000 tons. China imports around 10 million tons of polyethylene with Qatar accounting for around 5%.

On a global basis 2 million tons of capacity is less than 2% of capacity, but Qatar’s impact in the traded market is much more significant. The world would struggle to find an additional 70-80,000 tons of polyethylene if Qatar was out of the market for a month.

In the bale below we show polyethylene leverage and we have added Braskem because of the section above. Braskem does not look nearly as levered on a per share basis as the others despite how cheap the company looks in the earlier exhibit.

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