KRA

Publicly traded companies mentioned herein: Kraton Corp (KRA)

Highlights

The presenter is long shares of specialty chemicals Kraton Corp (KRA), which completed the acquisition of Arizona Chemical in early 2016. With the stock trading at $28-29, he sees limited downside risk based on valuation and KRA’s strong free cash flow profile. Management recently issued 2017 guidance ~10% below expectations when Q4/ FY 2016 results were announced (Feb. 28, 2017), and the stock did not fall. This was because people were largely expecting soft guidance due to a nearly perfect storm of higher raw material costs, and C5 pricing over 2016; and at that time butadiene and styrene prices were sitting at recent highs. What was not expected was management’s commentary about the cost being $30mm higher in Q1 2017 compared to the December (2016) cost if the March increase in butadiene prices was in line with expectations (+ 16-22 cents per pound). However, raw material costs have recently moderated and $15-20mm of the $30mm headwind should revert in Q2. While the presenter is unsure about whether management will be able to raise guidance for 2017, he does expect 2Q to be stronger than investors may think possible, and by year’s end EBITDA could come in at $370mm ($20mm ahead of guidance and Street expectations). At $29, the stock is trading at under 6x the consensus 2018 Street EBITDA estimate, which is $20+ million below his number. Applying a 7x multiple to his $410mm 2018 EBITDA estimate yields a $45 stock price (+55%).