Description

Mativ (MATV) is materially undervalued with a story that ticks all the VIC boxes: good business, cyclically depressed EBITDA, a merger with significant synergies, SOTP value with a divestiture to crystalize that value (we believe), 14% 2023 FCF yield, large insider purchases, acquisition target and no bulge-bracket sell-side coverage despite being a nearly $3bn TEV.

MATV is a specialty materials business formed as a result of the merger of Schweitzer-Mauduit (SWM) and Neenah (NP). The companies completed their all-stock merger on July 7th, 2022.

SWM and NP are both Kimberly-Clark spinouts from the mid-1990s and mid-2000s, respectively. They were both headquartered in Alpharetta, Georgia, 3.8 miles down the road from each other. They have both been acquisitive and evolved their portfolio since their respective spinouts.

There are four pro forma (“PF”) business lines which will be reported as two segments going forward:

Advanced Technical Materials (ATM) – ~65% of Revenue, ~55% of EBITDA, ~14% margin

• Legacy SWM Advanced Materials & Structures (~38% of PF Revenue) – highly engineered resin-based nets, films, adhesive tapes, foams, and other non-wovens serving the healthcare, construction, industrial, transportation and filtration end-markets. Primarily petrochemical/resin-based and specifically polypropylene derivatives
• Legacy NP Technical Products (~27% of PF Revenue) – various filtration and coated substrates used in water, transportation, general industrial, personal care, medical and consumer end-markets. Primarily softwood pulp-based derivatives

Fiber-Based Solutions (FBS) – ~35% of Revenue, ~45% of EBITDA, ~21% margin

• Legacy SWM Engineered Papers (~20% of PF Revenue) – tobacco-related papers that provide a fire-safety feature by self-extinguishing when not actively being smoked
• Legacy NP Fine Papers & Packaging (~15% of PF Revenue) – niche specialty or high-end printing paper supplier

The ATM business is the higher quality, true specialty materials business where customers choose MATV based on product quality/performance and are spec’d into the end-product. While 14% margins don’t scream specialty, margins are cyclically depressed on price/cost by ~300bps – we’ll get back to this later.

The FBS business is more of a cash cow business with high margins and low capital intensity. We believe MATV is going to sell part of this segment, which we discuss below.

Bull case:

1. Good business, should be a ~mid-single-digit revenue grower and approaching high-teen EBITDA margins with low capex intensity (~3% of revenue)
2. Significant earnings power from price/cost recovery and synergies - $450mm EBITDA target vs. $371mm in 2022. One of the few industrial companies that has a high degree of visibility into EBITDA growth in 2023
3. Extremely cheap stock trading 6.6x management’s EBITDA target (which we believe will be achieved by 2024)
4. Our SOTP analysis results in a 7.5-9.0x EBITDA multiple, and we believe management is going to divest certain businesses to crystalize this value
5. Good FCF generator with a 14% 2023 levered FCF yield
6. Insiders purchased nearly $6mm in stock in the past year at an average price of $23.54 (+6% vs. current)
7. Acquisition target
8. No bulge-bracket sell-side coverage

Earnings Power

The crux of this opportunity lies in understanding the noise around historical performance of the business. In the following EBITDA bridge, we highlight why we believe the Company’s EBITDA targets are achievable.

EBITDA:

All of these numbers are combined SWM+NP, but importantly DO NOT pro forma acquisitions that they’ve done

• 2019: $320mm
• 2020: $314mm
• 2021: $334mm
• 2022E Guide: $371mm
• 2023E Guide: ~$400mm (informal guide)
• Original 2022E Guide: $400mm (un-synergized)
• Mgmt. Target: $450mm (synergized)

OK seems straightforward - it appears the business didn’t decline much in 2020 and has continued to grow from there. But we are missing some key facts which mask the underlying trends.

To start, let’s lay out the M&A that these companies have completed over this time period.

M&A by Date Closed:

• 3/13/20: SWM acquires Tekra and Trient for $155mm, EBITDA of ~$16mm
• 4/6/21: NP acquires Itasa for $243mm, EBITDA of ~$21mm
• 4/16/21: SWM acquires Scapa Group (SCPA LN) for $552mm, EBITDA of ~$50mm for the year ending 3/31/20

So hang on a second, let’s do some simple math. Combined 2019 EBITDA of $320mm, plus the M&A of $87mm equals $407mm. And this is before MATV’s $65mm synergy target. That compares to doing $371mm in EBITDA this year, a ~$400mm loose guide for next year, and a $450mm EBITDA target with synergies.

And no, the $371mm this year is not due to a big decline in the cigarette-related business. Engineered Papers, which is only 20% of pro forma revenue, had volumes -4% in 2020, -2% in 2021 and +4% YTD in 2022.

Instead, it’s price/cost - namely resins, pulp, and energy. The two companies called out ~$60mm of price/cost headwind in 2021, and we estimate there is still a -$20mm headwind in the 2022 numbers.

Other headwinds in the 2022 numbers include: 1) ~$8mm one-time cybersecurity incident in 3Q22; 2) $5-10mm of FX headwinds. The Company also noted macro weakness in 2H, particularly in Europe where it has ~one-third of revenue.

If we adjust the $371mm guide + $20mm price/cost + $8mm cybersecurity + $60mm synergies (it has achieved $5mm in 2022E) and annualize the macro weakness (-$8mm), we arrive at $452mm.

Just in case this wasn’t all clear, here it is in Excel:

In terms of the confidence of recovering the price/cost headwinds, we’d put it at a very high probability. The Company’s price/cost headwind peaked in 2021 at a ~$60mm headwind, and it’s on track to recover ~two-thirds of that in 2022. Pricing was up double digits on a consolidated basis in 3Q22, and the game of catch-up with raw materials is easing as raw materials either stop going up (pulp) and/or have started declining (resins).

Per the below, pulp prices have stopped going up, and softwood prices, which MATV is more closely tied to, have started declining. Every 10% move in pulp prices equates to a ~$20mm move in raw materials.

Similarly, resin prices have now started meaningfully declining. Every 10% move in resin prices (across multiple products, of which polypropylene is the largest) equates to a ~$30mm move in raw materials.

Valuation/SOTP

MATV is currently trading at 6.6x management’s $450mm EBITDA target, which, per the above bridges, appears achievable. For our base and upside case, we do a SOTP analysis on this $450mm EBITDA, using 10-12x EBITDA on the ATS segment, and 5-6x on the FBS segment. This yields a $32-43 price target (after discounting one year at 10%) or +43-95% vs. current.

Comps for the ATS segment generally trade in the ~12-14x range, and we take a -2x discount to reflect some conservatism plus acknowledging this is a newer equity story. On the FBS segment, comps trade 5-8x and we utilize the lower half. Realistically, we think 6x is appropriate using ~5x on the Engineered Papers segment (cigarette business) and ~7x on the Fine Papers & Packaging segment.

In our downside case, we assume management just gets back to $400mm of EBITDA with synergies being offset by deteriorating macro. We also utilize a punitive 6.5x multiple to get to a $15.50 price target or -30% vs. current.

Separation of Engineered Papers (We Think)

We believe management intends to evaluate a sale of the Engineered Papers business to remove whatever stigma remains, even though it is only ~20% of pro forma revenue. This will allow the Company to effectively transition into a GDP+ growth business with a cleaner growth algorithm and attractive margins. We think this would also position the Company to be more attractive from an M&A perspective.

Sidoti Conference 9/22/22 (Emphasis Added):

Analyst: Okay, thanks. Again, it’s very early in terms of the integration process. But are there any segments of the overall product portfolio that you may look to divest at some point? Or are you content with how it’s constituted going forward?

Julie Schertell (CEO): Well, I think the nice part of having a larger companies [sic], it gives us opportunities to consider different parts of our portfolio that may not be strategic or may not be contributing to the margin that the levels that our expectations are. So, we'll always continue to look to evaluate our portfolio, and how that can help reshape our company into a higher growth company. And now we have the opportunity to do that. Because we have more scale. It's really hard to do when you're a billion or a billion and a half dollar company, because every dollar of revenue matters, matters just to a much greater degree.

A Note on Leverage and Capital Allocation

While the Company is currently levered 4.7x on 2022E EBITDA guidance, we’d point out a few reasons this doesn’t bother us:

1. Holding net debt constant, this drops to 4.4x on $400mm EBITDA (loose 2023 guide), and 3.9x the $450mm EBITDA target
2. Conservatively we have MATV generating $170mm of levered FCF next year (after ~$100mm of interest expense)
3. In testing the 5.5x max net leverage ratio (4.5x by 12/31/23), the Company can adjust for synergies per bank definitions. They expect to end 2022 at 3.75x on a bank definition of EBITDA
4. The Company has ~75% fixed rate debt including interest rate swaps
5. To the extent they sell Engineered Papers, that would modestly reduce leverage

Risks:

• Execution for a new story, although both Companies were already public
• Macro weakness
• Inability to divest Engineered Papers
• Integration risks
• Further price/cost issues
• Synergies don’t materialize
• Leverage

Catalyst

Engineered Papers divestiture

Sell-side initiations

Price/cost recovery

Synergy realization