Avient Stock: Completing Its Transition (NYSE:AVNT)

In April, I last covered Avient (NYSE:AVNT) as the company was getting more special as the company, formerly known as PolyOne, announced the purchase of specialty assets from Dutch-based DSM in a deal which looked quite compelling. Alongside that deal, Avient announced its intention to sell its distribution business, something which has not materialized at reasonable conditions.

The Thesis

My last take ahead of the April deal dated all the way back to 2013 when PolyOne sold its vinyl dispersion, blending and suspension resin activities in a deal valued at a quarter of a billion. The company was awarded a $2.7 billion enterprise valuation at the time when the business generated $3 billion in sales as shares were awarded a 30 times multiple at $25 per share. This high valuation was the result of big promises and lower profitability at the time, with earnings guided to rise to $2.50 per share by 2015, translating into non-demanding forward earnings multiples.

Despite these promises, the company has not really delivered on its earnings ambitions, at least not in 2015 already. I pick up the story in the summer of 2020 as PolyOne announced a $1.4 billion purchase of the color masterbatch business of Clariant, only to be named Avient in the rebranding process thereafter. With the company initially guiding for 2021 earnings between $1.90 and $2.40 per share, those are adjusted earnings, the situation was not too clear-cut, although the company kept on hiking the guidance through the year, but these numbers obviously were far lower than the 2015 ambitions outlined many years before.

The company did eventually post 2021 sales at $4.8 billion on which adjusted earnings of $280 million were posted, equal to earnings of $3.05 per share. Net debt of $1.26 billion translated into a reasonable 2.2 times leverage ratio with EBITDA posted at $581 million. With 2022 revenues set to rise to $5.1 billion and earnings seen around $3.50 per share, the future arguably looked good, as the quality of the business had improved with greater focus on specialty markets, creating more exposure to defensive and more diversified segments.

In April, shares rose from $45 (which marked a non-demanding 13 times earnings multiple) to $50 as the company reached a deal to acquire the protective material business from DSM in a $1.48 billion deal. That deal was significant with Avient awarded a $5.6 billion enterprise valuation, yet with a $415 million in sales and $130 million EBITDA contribution, the 11 times EBITDA multiple was not too demanding. The deal will add quite some earnings power ($0.35 per share) as pro forma net debt would increase to $2.8 billion, for a 3.7 times leverage ratio.

The company announced that leverage would not come in that high as Avient aimed to sell its distribution activities, with no details announced at the time, as the company guided that leverage ratios would fall towards 3 times. With shares trading at 15 times forward earnings and leverage seen a bit high at 3 times, Avient looks a decent play, certainly as it has become a lot less volatile, making that I was warming upto Avient at the time. It was the rally to the low-fifties upon the news announcement which prevented me from chasing the shares.

What Now?

Since April, shares of Avient have traded in a $40-$50 trading range, now exchanging hands at $40 per share, marking some investment losses amidst dollar strength and continued uncertainty in the economy, with the European economies under severe price pressure of course because of the energy crisis.

In July the company posted resilient second quarter results with revenues up 5% to $1.3 billion as adjusted earnings came in at $0.98 per share as the company maintained the $3.50 per share full year earnings guidance. With earnings posted at $1.96 per share in the first six months of the year already, that implies some weakness being anticipated in the second half of the year, or perhaps some conservative guiding practices. Pro forma net debt is seen at $2.7 billion as some cash flows have been generated throughout the quarter. Such deleveraging is needed as the company priced more than $700 million in debt at more than a 7% interest rate, a steep cost by all means.

In August, the company sold its distribution business in a $950 million deal to H.I.G. Capital, albeit that after-tax proceeds are only seen at $750 million. This makes for a pro forma net debt load of $2.0 billion here. The 10 times EBITDA multiple looks fair, albeit that tax leakage likely creates some dilution.

With $95 million in EBITDA leaving the door, while the DSM acquisition will add $130 million in EBITDA, the net contribution is $35 million, assuming that D&A charges are equal in both deal. After factoring in tax considerations, net debt will increase by $750 million, making that perhaps small dilution is seen at first, albeit aimed to create a better positioned business.

With leverage seen below 3 times and earnings power seen around $3.50 per share, valuation multiples remain non-demanding, as I remain positive on Avient. The issue is that the increased uncertainty in the global economies make me a bit more cautious, yet I am still very constructive on Avient here, as the effect of these value-creating deals should materialize in the results in the coming quarters.