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Yulu Ying

HUN AT A GLANCE

P/E ► 3.69 VERY LOW EV/EBITDA ► 4.18 LOW ROA ► 10.4% AVG ROE ► 37.8% HIGH Debt to Equity ► 4.17 HIGH Current Ratio ► 2.53 AVG Interest Coverage Ratio ► 5.61 AVG

 

 

 

 

 

 

Huntsman manufactures chemicals used in insulation, construction materials, adhesives, electronics and paint. In 2007, polyurethanes accounted for 39.6% of sales, driven by the strong growth of MDI (a type of polyurethane), a versatile material mostly used in construction and insulation.^[1], and revenues totaled $9.65 billion. Huntsman sells its products globally, with a strong presence in the US and in the Netherlands. In 2007, sales in the US and the Netherlands accounted for 49.6% and 22.5% of sales respectively.^[2]

In the past 5 years, Huntsman has been plagued by debt. In 2003, Huntsman had debt of $5.9 billion on revenues of just $4.8 billion, and although the ratio has improved (total debt was $3.6 billion in 2007), the interest from the debt has been the main reason Huntsman has been unprofitable. In the five years from 2003 – 2007, 2006 was the only year Huntsman has posted a positive net income.^[3]

Business Financials

Huntsman operates in four main business segments: polyurethanes, materials and effects, performance products and pigments. Polyurethanes, by far the largest segment in terms of revenue with $3.8 billion in 2007, supplies chemicals used in insulation, construction and other cushioning applications. Materials and effects, with revenues of $2.4 billion, supplies chemicals in adhesives and other complex engineering fields. Performance products, with similar revenues of $2.3 billion, provide chemicals in more everyday uses, such as detergents and personal care products. Pigments, which are solely used in paints and inks, manufacture just one product, titanium dioxide.

Even though polyurethanes account for most of the revenue in the company, it is also the most profitable. In 2007, the earnings margin for polyurethanes was 15.5%, well above the next highest performer in performance products, which was just 8.7%. Pigments, which is a commodity product, is the least profitable, posting earnings of just $51.2 million or 4.6% of its revenue. Although Huntsman disposed of its polymer and base chemical businesses in 2007, they still contributed to a $327.3 million in negative earnings.^[6]

The revenue for the company as a whole grew 10.5% from 2006 to 2007. vRevenue has roughly doubled in the past five years. Unfortunately, as revenues rose, so did costs for the company. From 2006 to 2007, cost of goods sold increased in line with revenue at 10.9%. Coupled with a high interest payment, Huntman has not been able to translate higher revenue into higher earnings. As a matter of fact, the only profitable year for Huntsman was 2006, when there were no major restructuring or disposal costs. However, excluding 2007, which saw major costs in restructuring and sale of the company, Huntsman has been improving its net income since 2003. In 2007, Huntsman paid its first dividends ever with $.40 per share.^[7]

Key Trends and Forces

MDI sales are the key driver of revenue growth

With a margin of over 15%, MDI, a tough polymer used in making various types of foam, is the most profitable product in Huntsman’s portfolio. The market for MDI is strictly regulated and the prices are kept high by the big players in this industry (BASF, Dow, Bayer and Huntsman). With the growing use of MDI used in construction insulation instead of traditional insulation, MDI is expected to see steady growth in the world, especially in China where construction is booming.^[8] In 2006, Huntsman completed a joint venture in China to increase output of polyurethanes, especially MDI, in the Asia region.

The amount of debt can still hurt the company’s bottom line

Although Huntsman was able to lower its debt to $3.6 billion, the company is still obligated to make large interest payments that will hurt the company’s profits. Additionally, a history of debt will make it harder for the company to obtain additional debt if the economy takes a prolong downturn. Finally, a large portion of the debt has a variable interest rate. This means that depending on future developments in the macro-economy, interest payments for Huntsman can either rise or fall.

Further merger delays could hurt Huntsman sales

On July 12, 2007, Huntsman agreed to be purchased by Hexion Specialty Chemicals for $28 per share. Huntsman had been looking for a suitor because of its outstanding debt.^[9] While the acquisition was still under review by the government, Hexion backed out, citing the unavailability of capital during the global economic downturn. Huntsman sued for damages; a preliminary court ruling ordered Hexion to complete the acquisition, but the company appealed.^[10]

Continuing changes in environmental, health and safety laws can cost the company

For the past two years, expenditures related to environmental, health, and safety issues have surpassed $50 million, with 2007 expenditure as $68.5 million.^[11] Since Huntsman manufactures specialty chemicals, the laws which govern their production are changing regularly. Each year, Huntsman must spend money improving and fixing their facilities to comply with these laws in the US as well as in other parts of the world. With environmental standards getting more stringent in the US and in Europe, EHS costs are expected to rise in the coming year.

Competitors

Because Huntsman manufactures a variety of chemicals, it faces many competitors across its product lines. However, there are a few companies, such as BASF and Dow, which compete with Huntsman in almost every category. While the competition is stiff in the industry, especially in commodity chemicals, competitors do seem to work synergistically to keep prices high and margins high. For example, while BASF and Huntsman compete in MDI, they are currently working together in a joint venture in China to produce MDI for both companies in Asia.

• Bayer : Although Bayer is predominately a pharmaceutical company, Bayer is one of the “Big Four” that manufacture MDI in the world. Since four companies control this product, prices are kept high and thus margins high. However, the “Big Four” have been named in lawsuits both in the US and in Canada for price fixing of MDI. If the chemical companies lose, the relationships between the companies will certainly change.

• BASF : BASF is another major player in the MDI industry. In addition, BASF is a specialty chemicals manufacturer who competes with Huntsman in almost every segment. The fiercest competition is in the pigments segment where the product is highly commoditized.

• Dow Chemical Company (DOW) : Dow is the second largest chemicals manufacturer in the world and is the last of the “Big Four”. Like BASF, Huntsman competes with Dow in almost every product segment.

• DuPont (DD) : DuPont competes with Huntsman on pigments or paint. DuPont, a company historically known for its paint products, has mega-customers like Ford which Huntsman still lacks.

References

1. ↑ 2007 HUN 10K, Page 78
2. ↑ 2007 HUN 10K, Page 244
3. ↑ 2007 HUN 10K, Page 71
4. ↑ 2007 HUN 10K, Page 84
5. ↑ 2007 HUN 10K, Page 68
6. ↑ 2007 HUN 10K, Page 78
7. ↑ 2007 HUN 10K, Page 126
8. ↑ 2007 HUN 10K, Page 15
9. ↑ "Huntsman agrees to Hexion's $10.6 bln bid" July 12, 2007, Marketwatch
10. ↑ "Huntsman Corporation Says Court Orders Hexion To Complete Merger" Sept 30, 2008, Reuters
11. ↑ 2007 HUN 10K, Page 207