Global Chemicals Weekly:News,views and valuation

Axalta (AXTA.N, BUY)

    Axalta shares rose 2% following a positive ‘17outlook call as i) the midpoint ofEBITDA guidance was in-line with consensus (+6% YoY), ii) managementexpressed confidence in making at least $100MM of acquisitions in ’17and iii)management discussed plans for a 2nd phase of its Axalta Way productivityinitiative that should save in excess of $100MM starting in ‘18. While Axalta willface headwinds in ’17from higher raw materials and FX, these should be morethan offset by volume growth, price increases and productivity savings. While’17will likely be another year of modest EBITDA growth (+6% vs +4% in ’16), withvaluation an attractive 9.7x ‘17E EBITDA vs 10.7x for PPG, Buy.

    PPG Industries (PPG.N, HOLD)

    While the targeted savings (of $125MM, or $0.35) from PPG’s latestrestructuring plan were slightly above our expectations (of $100MM), weestimate the projected savings of $0.12-$0.14in ‘17will be fully offset byheadwinds from FX (Euro {-6% since the end of Q3}, Mexican Peso {-5% sincethe end of Q3}) and raw materials (propylene and TiO2up 65% and 6% off oftheir ’16lows, respectively). As such, we are maintaining our ‘17E EPS of$6.30, up 7% (consensus: $6:36). With ’17likely, in our view, to be PPG’ssecond straight year of sub-10% EPS growth (‘16E EPS +4%), we believevaluation of 15.7x ‘17E EPS and 10.7x ‘17E EBITDA is fair. As such, wemaintain our Hold rating.

    LG Chem (051910.KS, BUY)

    Despite solid earnings at the chemical division, LG Chem has been one of theworst-performing chemical stocks in the region. Progress has beendisappointing in EV batteries and loss-making I&E materials, andmanagement’s efforts to acquire LG Life Science have further underpinned theshare price performance. Based on a sum-of-the-parts valuation, the currentshare price implies zero value for EV batteries and I&E, while valuing itschemical division at 5x EV/EBITDA. Although the stock seemingly lacks nearterm catalysts, we expect an eventual turnaround in earnings in FY17E.Maintain Buy.