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W.R.

Grace Corporation (NYSE: GRA)


Current Price (5/1/15): $97.50
Price Target: $137.30

Mitesh Amarthaluru (Duke 17), Venkata Amarthaluru (Wharton 15, Engineering 15), Nicholas Liu (Wharton 15,
Engineering 15), John Lu (Wharton 15, Engineering 15), Anubhav Maheshwari (Wharton 15, Engineering 15)

Video Pitch Link: http://tinyurl.com/WRGrace
May 4th, 2015

I. Company Overview
Business Description
Industrials Company operating in catalyst technologies, materials technologies, and construction products
Exited Chapter 11 on Feb. 3, 2014 after 13 years in bankruptcy due to asbestos litigation
Management has announced plan to spin-off Graces construction products business in 2016 with New
Grace retaining the catalysts technologies and materials technologies businesses
Idea Generation: Circle of Competence 1. Industrials Sector 2. Special Situations 3. Engineering Expertise
Operating Segments
Catalyst Technologies: Largest player (33% share) in oligopolistic industry with secular tailwinds
Construction Products: 2nd largest player (8% share) for concrete admixtures industry, Largest player (18%
share) for cement additives; industry fragmentation resulting from localized monopolies

Financials

2014 Revenue
andBreakdown
EBIT Breakdown
2012 Sales

Current Price

$97.50

Market Cap

$7.0bn

Enterprise Value

$8.5bn

EBITDA Margin (2014)

17.8%

EV/TTM Adj. EBITDA

11.2x

EV/(EBITDA-Capex)

13.1x

As of May 1st, 2015

II. Investment Thesis


W.R. Grace is a recession-resistant cash compounder with clear paths to value realization.
1. Grace operates in an oligopolistic industry with high barriers to entry, market share stability,
and high ROIC levels.
2. Grace maintains a deep competitive moat and recession resistant business due to customer
captivity, specialized products, and technical expertise.
3. Consensus mispricing exists in the marketplace because of Graces post-bankruptcy status,
understatement of excess assets, and overlooked margin improvement potential.
4. There are clear pathways to value realization from the upcoming spinoff, effective capital
allocation, and increased investor transparency.
Recommendation: Buy Grace stock pre-spin with the intention of selling Grace Construction Products stock following
its spin-off in 2016 and hold New-Grace over at least a 3 year period to realize a projected asymmetric equity upside
of 40.08%.
SOTP Equity Value
Cumulative Upside
Value CAGR over 3 Years

$ 109.84 $
12.06%
3.87%
3

137.30
40.08%
11.89%

III. Industry Overview: Catalyst Technologies


Oligopoly with high barriers to entry

Pricing discipline in oligopoly

W.R. Grace is the market leader in an


oligopolistic industry where the top 4 players
have 89.2% market share

Catalyst technologies companies limit capacity


expansion to 1-2% per year with a focus on value
accretive pricing
Increasing pricing allows a more effective
EBITDA lift increasing volume

Capacity (thousand tons)


(x) Utilization
Volume
Price ($/ton)
Revenue
Price Change
EBIT Loss
EBIT Margin

Barriers to Entry
Economies of Scale: 45% of cost structure is
fixed, providing high operating leverage
Demand Side Barriers: Customer specific
products create high switching costs
Technology Barriers: Specialized technology
with continued R&D investment necessary

Current
Additional
Sales
Capacity
444.5
163.5
85.0%
85.0%
377.8
139.0
$3,300.0
$2,970.0
$1,246.8
$412.8
(10.0%)
($124.7)
$124.7
30.2%

Price Decrease
Additional Capacity Necessary

(10.0%)
36.8%

Albemarle attempted volume competition in 2012-2013


unsuccessfully and recognizes importance of pricing discipline.
Anonymous, Goldman Sachs Equity Research Analyst
4

III. Industry Overview: Catalyst Technologies


Evidence of barriers to entry

Refining catalyst market share stability

1. Market shares for oligopolistic players have


shifted by less than 5% since 2010
2. Adj. ROIC (5 year average) of 31.5% for Catalyst
division consistently exceeds 8.5% cost of capital
3. Value enhancing pricing industry structure where
price is not sacrificed for market share increase

Operational Segment ROIC: Catalyst technologies outperformance

III. Industry Overview: Macro View


W.R. Grace benefits when crude prices fall and experience limited effects when prices rise.
Crude Price v. Refinery Utilization

GRA Sales v. Refinery Utilization

Crude Price v. GRA Sales

3 Year Avg. Correlation v. Time

1. Compiled using US Energy Information Administration Statistics (LWC Estimates)

IV. Business Model: Competitive Advantages


Customer Stability

Refinery

Products are non-substitutable to customers


and small percentage of cost:(2)
Essential input for crude breakdown and
specialized to customers
For refining catalysts, for barrel of oil
refined, $0.15-$0.25 in catalyst cost
With total refinery cost of $4.75 per barrel,
catalyst cost represents ~4.2% of total
costs in the refinement process(3)
1% of cement producers costs are additives

1. Source: The Catalyst Group


2. Source: Anonymous, W.R. Grace Finance Manager
3. PBF Energy May 2014 Presentation

Focus on core competencies has enabled Grace


to become a market share leader in its products

Specialty

Long Standing Customer Relationships:


Extended 3 year contract life for catalysts
Customer renewal rate of 70% at contract
completion(1)
Largest customers have specialized
products and have worked with Grace for
decades

Future

Leading Market Positions

WR Grace Market Position


FCC
HPC EB Resid
HPC FB Resid
HPC Distillate
HPC Hydrocracking
Polyethylene (PE) Catalyst
PE Catalyst Support
Polypropylene (PP) Catalyst
PP Process Technology Licensing
PE / PP Single Site Catalyst
Chemical Catalysts
Zeolite Technology
Biofuels Catalysts
MTO Catalysts

Legend

Market Leader

Strong Position

Developing Position

No Position
Source: GRA 2014 Investor Day Presentation
7

2008

2014

IV. Business Model: Competitive Advantages


Technical Barriers to Entry

Technical Advantages

Graces products are non-commodity with


individual customer customization
New catalyst products have research life cycles of
at least 1 year

Technical advantages of Graces product results


in economic uplift of $0.40/bbl(1)
Competitive Base

C/O Ratio

6.9

6.4

76.0

77.4

1.0

1.0

LPG, wt%

18.3

18.6

Gasoline

54.2

55.3

LCO, wt%

17.2

16.9

6.8

5.7

Conversion, wt%
Dry Gas, wt%

Extensive research by my team is necessary to create


superior technology that meets specific needs. Product
customization is a requirement for us to succeed.
Anonymous, Senior Principal Engineer, W.R. Grace

Bottoms, wt%

Economies of scale from R&D expenditures

1. Christophe Chau, Rosann Schiller, W.R. Grace Catalagram Spring 2015

W.R. Grace

IV. Business Model: Recession Protection


Recession protection

Above-cycle utilization

Through the 2008 recession, Grace experienced


only a 15% revenue reduction while increasing
operating margins due to pricing power
Overall improvement in margins since 2010
highlights operating leverage, sustained ROIC,
and nimble supply chains
W.R. Grace Key Operating Metrics
3500

40.0%

3000

35.0%

$mm

25.0%

2000

20.0%
1500

15.0%

1000

10.0%

500

5.0%

0.0%

EBITDA Margin %

Above average utilization allows the business to


benefit from increased operating leverage

Difficulty of supply coming online provides a


favorable supply/demand backdrop (demand
expected to grow 3.0% annually)

*A lb emarle IR P res entatio n


**C hemical W eek
***Letz s ch C o ns ulting
****T he C atalys t G ro up

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenue

Industry has a current utilization of 94.6% while


normalized cyclical utilization is 85.0%

Key
Market Size ($mm)*
FCC Cost ($/mt)**
Sales Volume ('000s mt)
Annual Capacity ('000s mt)***
Utilization
Typical Utilization****
Deviation from Norm

30.0%

2500

Gross Margin %
EBIT Margin %

Value
$2,622.0
$3,300.0
794.5
839.5
94.6%
85.0%
11.3%

V. Value Drivers: Construction Products Spin-off


1. Spin-off of construction products provides multiple pathways to value realization.
1. Multiples normalization to industry peers results in 33.2% upside

Specialty Catalysts comps trade at EV/FY14 EBITDA of 8.7-14.0x


Construction Products comps trade at EV/EBITDA of 6.7-9.3x
Grace trades at EV/EBITDA of 11.2x due to disproportionate drag from construction
On a SOTP+NOL basis, Grace should be trading at a multiple of 13.0x, an upside of 33.2%

2. Leverage moved to Construction Products spin-off, delevering New Grace cap structure
New Grace is anticipated to have Net Debt/Adj. EBITDA of 2.0-2.5x, while Grace
Construction Products is projected to have Net Debt/Adj. EBITDA of 3.0-3.5x

3. Refocused business models


Spin-off will allow for investment decisions to be optimized based on each respective company,
improving management focus and cost productivity
Grace Construction Products requires significantly more capex relative to New Grace, requiring
a different financing model

10

V. Value Drivers: Effective Capital Allocation


2. W.R. Grace is properly incentivized to continue implementing effective capital allocation.
Distressed Activist Ownership

Incentivized Management

Activist investors
own 27.7% shares

Fred Festa, CEO and Chairman of W.R. Grace,


has a $14.9mm position in Grace common stock
Festas background at GE and Morgenthaler
Private Equity Partners shapes his ideology of
shareholder value enhancement
According to the DEF14A, key executives must
maintain 3-5x base salary in the form of stock

Engaged shareholder
base improves capital
allocation and creates
value enhancement

Business Reinvestment

Share Repurchases
In Feb. 2014, the board announced a share
repurchase program of $500mm ending Jan. 2015
In Feb. 2015, the board announced a similar
program to buy back an additional $500.0mm
Graces $557.5mm cash position provides dry
powder to execute share repurchases
$400mm adjusted annual FCF provides additional
funds to for shareholder friendly practices
1. CapitalIQ Public Ownership Detail - Form13F
2. Definitive proxy statement DEF 14A
3. WR Grace: The End of an Empire- The Wall Street Journal

W.R. Grace only operates in core competency


businesses where they have a #1 or #2 position.
Grace has demonstrated accretive bolt-on
acquisitions through 22 successful investments
from 2003 through 2014
Disciplined Investment Criteria: Strategic fit
(technology, market access), hard cost and capital
synergies, and risk-adjusted return.
11

V. Value Drivers: Net Operating Loss Carryforwards - Tax Asset


3. W.R. Graces overlooked NOLs provide additional upside to SOTP valuation.

W.R. Grace has accumulated a $1.8 billion NOLs ($670mm - Carryforward from emergence of
bankruptcy, $632mm - PI DPO settlement, $490mm - Warrant settlement)
Lack of significant change in ownership during the bankruptcy process allowed W.R. Grace to
maintain a substantial amount of its NOLs (governed by IRC Section 382 Limitation)
The cash tax rate is anticipated to remain in the range of 10-15% through 2018
NOLs have a NPV of $0.4 billion adding an additional 5.7% upside to SOTP valuation
2 0 15 E

2 0 16 E

2 0 17 E

2 0 18 E

2 0 19 E

2020E

2 0 2 1E

Revenue
EBIT
US EBIT
Interest Payments
US EBI (Pre-Tax Income)

N O L D C F

3375.1
667.0
200.1
-59.3
140.8

3511.3
710.0
213.0
-59.3
153.7

3651.0
754.9
226.5
-59.3
167.2

3793.4
801.5
240.5
-59.3
181.1

3937.7
838.2
251.4
-59.3
192.1

4083.3
874.9
262.5
-59.3
203.1

4229.3
911.3
273.4
-59.3
214.1

Beginning US NOL Balance


NOL Carryforw ard Usage
Ending US NOL Balance

1800.0
-140.8
1659.2

1659.2
-153.7
1505.5

1505.5
-167.2
1338.3

1338.3
-181.1
1157.2

1157.2
-192.1
965.0

965.0
-203.1
761.9

761.9
-214.1
547.8

35%

35%

35%

35%

35%

35%

35%

Beginning DTA Balance


DTA Change
Ending DTA

630.0
-49.3
580.7

580.7
-53.8
526.9

526.9
-58.5
468.4

468.4
-63.4
405.0

405.0
-67.2
337.8

337.8
-71.1
266.7

266.7
-74.9
191.7

Discount Factor
Discounted Value

0.922
45.4

0.850
45.7

0.784
45.9

0.723
45.8

0.666
44.8

0.614
43.7

0.566
42.4

Statutory Tax Rate

Discount Rate
NPV of NOLs ($mn)

8.46%
408.1

WACC

12

V. Value Drivers: Margin Expansion Opportunities


4. W.R. Grace has a visible pathway and credible track-record for margin expansion.

Spin-off of GCP provides restructuring opportunities to reduce operating costs

Improved management focus and lower corporate costs drive operating margin expansion
Based on 2015 Q1 results, adjusted EBIT Margin has already increased 130 bps yoy

Further Margin Expansion Opportunities:


1. Continued investment in targeted R&D creates better product mix with improved pricing power
due to innovative product launches in an up-cycle (+100 bps)

Pricing power will be further driven by secular demand growth, especially for FCC Catalysts

2. Aggressive supply chain repositioning based on flexible global operations enables margin
expansion at the operating income level (+100 bps)

Grace has benefited from increase in demand in key global markets

3. Cycle-bottom prices for major inputs such as rare earth metals, especially Lanthanum Oxide, reduce
production costs (+100 bps)

At $1.03/kg (2014), Lanthanum Oxide is at the lowest price point since 2008
"Improving petchem ROA should come from underlying operational improvement
and better capital allocation."

Dan Loeb, Third Point, 2014 Q1 Investor Letter


13

VI. Mispricing and Catalysts


Mispricing

Extended 13 year Chapter 11 process due


to asbestos litigation has resulted in limited
coverage for Company besides investment
positions by distressed funds

Sell side overlooks excess assets including


excess cash ($500.0mm) and excess
investment in unconsolidated affiliate
($173.8mm)
Provides additional 8.4% upside

Managements ability to improve the margin


post-restructuring is not modeled into sellside valuation
Margin expansion by 300 basis points
provides 16.7% incremental returns

Share repurchases driven by incentivized


management and distressed activist funds
Monetization of JV with Chevron provides
reclassification of excess asset into core
operations

Increased Investor Transparency

14

Separation of GCP will provide natural


shareholder turnover, lead to normalized
multiples expansion, and address double
cyclicality valuation challenges

Shareholder Friendly Measures

Margin improvement is underestimated

Spin-off of Grace Construction Products

Excess Asset Value

Post-Reorganization Equity

Catalysts

Increased coverage of orphan stock after


extended Chapter 11 process will increase
investor demand
Simplified capital structure due to PI DPO
reduces situational complexity

VII. Valuation
W.R. Grace has multiple pathways to unlock value for an asymmetric risk-reward.
Incremental Return

Cumulative CAGR

I. Sum of the Parts

16.1%

5.1%

II. Net Operating Loss Carryforwards

+ 5.7%

6.8%

III. Share Repurchase

+ 1.6%

7.3%

IV. Margin Expansion

+ 16.7%

11.9%

40.1%

11.9%

15

VIII. Key Risks


Key Risks & Mitigants
1. Spin-off of construction materials business may not receive approval.
Panelist of distressed and activist funds will help push through a vote
Management under Fred Festa will focus on value accretive shareholder measures

2. Cyclicality of construction end markets could result in depressed sales.


Spin-off will help separate out cyclical construction from non-cyclical specialty catalysts/materials
Improving non-housing construction provides favorable backdrop for construction business

3. W.R. Graces Defined Benefit Plan is underfunded by $473.1 million.


Margin of safety even with additional funding contribution provides asymmetric risk-reward
Shift to Defined Contribution Plan will provide more feasible course of action

4. Asbestos lawsuit result in excess payments to Property Damage claimholders.


Management incentive is to provide accurate, if not aggressive, estimates of asbestos liability to avoid
loss recognition in later years
Hard cap of $80mm on amount of additional liability that can be payable to claimholders

16

IX. Thank You!


Primary Research
Current Employees
Anonymous Senior Principal Engineer
Rosanne Schiller Director of Marketing
David Joseph Investor Relations
Tania Almond Investor Relations

Special Thanks To:


Justin Ang
Sahil Khetpal
Dominic Waltz

Competitors
Matthew Juneau Albemarle Investor Relations
Consultants
Anonymous The Catalyst Group

Important Disclosures: Certain accounts managed by us are currently long


W.R. Grace. We may buy and/or sell shares of W.R. Grace in the future for the
accounts managed by us without notice, and we are under no obligation or
agreement to take, or not take, any action or restrict our actions in any manner.
This is not a recommendation to buy or sell shares. Our views are subject to
change without notice and we may trade in any manner, whether consistent or
inconsistent with this recommendation. The information provided is from public
sources. We have not independently verified this information and we make no
representations as to the accuracy or correctness of any such information. We
undertake no obligation to update any information below.

Sell-Side
Anonymous Goldman Sachs
Anonymous Credit Suisse

17

X. Appendix: Bankruptcy Overview


Chapter 11 Reorganization

W.R. Grace filed for voluntary Chapter 11 on April 2, 2001 as a result of asbestos litigation

On February 3, 2014, W.R. Grace emerged from bankruptcy

Effects:
1. Two asbestos trusts under Section 524(g) of Bankruptcy Code
1. PI (Personal Injury) Trust-no further obligations
2. PD (Property Damage) Trust broken into non-ZAI and ZAI (attic insulation product) claims

2. Company has accrued unresolved non-ZAI PD claims that are probable and estimable
1. Non-fixed claims
2. Obligated payments to PD trust every 6 months based on non-ZAI PD Claims allowed by bankruptcy
court during preceding 6 months + interest + PD Trust expenses

3. ZAI PD Claims obligated for fixed payment of $30mm February 3, 2017 and 10 contingent payments
of $8mm per year to ZAI PD Account during 20 year period beginning on February 3, 2019, with
payments due only if assets of ZAI PD account fall below $10mm during preceding year
1. Liability recorded for fixed deferred payment
2. Not recorded for contingent payments
3. Secured by 77.4mm shares of new issuance common stock
18

X. Appendix: Summary of Variant View


Market Perspective

Our Perspective

Extended Chapter 11 process has resulted


in extended financial and reputational
damage to Company

Reorganized Company has minimal


exposure to asbestos litigation and long
term contract redemption rates are steady

Alternative fuel sources provide tail risk for


WR Graces operations

Secular tailwinds from renewed focus on


heavy oil refinement will drive volume sales
due to inelastic demand

Bearish outlook on energy-related industries

W. R. Grace benefits from lower crude


prices due to increased catalyst demand by
refineries

Market is focused on short term EPS vs.


earnings quality

Sell-side operates in sector specific


pigeonholes of chemicals vs construction

Due to FIFO Inventory accounting, there


is a lag until low input costs are realized in
COGS, which increase gross margin

SOTP valuation provides valuation clarity

19

X. Appendix: Specialty Building Materials & Packaging Industry


Demand Driven Building Products

High Value Packaging Products

Commercial construction recovery in US


and emerging markets infrastructure buildout creating demand for specialty building
materials
Increasing quality and sustainability of
construction projects relies on advanced
products

Waterproofing Systems
Roofing products

Conformation to Food & Beverage industry


regulations
Focus on design for convenience and
sustainability
Solutions address shift away from BPA
epoxy resins towards green products
Products are integrated into customer
plants and supply chains
Consumer Packaging Sealants Market Size
3,000

%
CAGR: 4.1

$millions

2,500
2,000
1,500
1,000
500
0
2012
1. BCC Research

20

2013

2014

2019

X. Appendix: Specialty Construction Products Industry


Highly Localized

Cement Additives
Marketshares

18%
71%

Concrete Admixtures Market


Share

15%

6%

8%

5%

7%
70%

Sika

BASF

Othes

BASF

Grace

Sika

Others

Global Cement Trends


6,000,000,000

120.00

5,000,000,000

100.00

4,000,000,000

80.00

3,000,000,000

60.00

2,000,000,000

40.00

1,000,000,000

20.00

0.00
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Grace

Production

21

Unit value ($/t)

2020
2030

Specialty cement products are critical for cement


manufacturers to enhance quality
Expansion in cement capacity from NA
construction revival, emerging market growth
Matching Supply/Demand characteristics imply
stable, growing prices
Graces advanced products cater to efficiency,
environmental concerns

Price

Primary products are Cement Additives and


Concrete Admixtures
Fragmented industry with few dominant players
Grace has manufacturing facilities across
the world, creating high quality global brand

Cement Pouction (metic tons)

Ongoing Secular Global Growth

X. Appendix: Valuation
Sum of the Parts
Base Case

Segment
New Grace
New GCP

Base Case + Share Repurchases

2015E EBITDA
$
$

Low

652.3
177.3

Multiple
High

10.0x
8.0x

Core Enterprise Value


Plus: Excess Cash
Plus: Excess Investments
Plus: Value from NOLs
Adjusted Enterprise Value
Less: Debt
Total Equity Value

9.6x

EV
Low

High

12.0x $ 6,523.1 $
10.0x $ 1,418.1 $
11.6x

7,941.2
500.0
173.8
408.2
$ 9,023.3
2,015.8
$ 7,007.5

Fully Diluted Shares Outstanding (MM)


Less: Share Repurchase Program
Total Shares Outstanding

$
$

7,827.7
1,772.7

New Grace
New GCP

9,600.4
500.0
173.8
408.2
10,682.4
2,015.8
8,666.6

72.6
0.0
72.6

SOTP Equity Value


Cumulative Upside
Value CAGR over 3 Years

Segment

New Grace
New GCP

2015E EBITDA
$
$

Core Enterprise Value


Plus: Excess Cash
Plus: Excess Investments
Plus: Value from NOLs
Adjusted Enterprise Value
Less: Debt
Total Equity Value
Fully Diluted Shares Outstanding (MM)
Less: Share Repurchase Program
Total Shares Outstanding
SOTP Equity Value
Cumulative Upside
Value CAGR over 3 Years

716.4
210.4

Low

Multiple
High

119.38
21.79%
6.79%

SOTP Equity Value


Cumulative Upside
Value CAGR over 3 Years

10.0x
8.0x
9.5x

EV
Low

High

12.0x $ 7,164.3 $
10.0x $ 1,683.5 $
11.5x

8,847.8
173.8
408.2
$ 9,429.8
2,015.8
$ 7,414.0

$
$

72.6
5.1
67.5
$ 109.84 $
12.06%
3.87%

652.3
177.3

Low

Multiple
High

10.0x
8.0x
9.6x

EV
Low

8,597.2
2,104.3
10,701.5
173.8
408.2
11,283.6
2,015.8
9,267.8
72.6
5.1
67.5
137.30
40.08%
11.89%

22

High

12.0x $ 6,523.1 $
10.0x $ 1,418.1 $
11.6x

7,941.2
173.8
408.2
$ 8,523.3
2,015.8
$ 6,507.5

Fully Diluted Shares Outstanding (MM)


Less: Share Repurchase Program
Total Shares Outstanding

Base Case + Share Repurchases + Margin Expansion

Segment

$
$

Core Enterprise Value


Plus: Excess Cash
Plus: Excess Investments
Plus: Value from NOLs
Adjusted Enterprise Value
Less: Debt
Total Equity Value

72.6
0.0
72.6

96.52 $
-1.53%
-0.51%

2015E EBITDA

$
$

72.6
5.1
67.5
$

96.41 $
-1.64%
-0.55%

7,827.7
1,772.7
9,600.4
173.8
408.2
10,182.4
2,015.8
8,166.6
72.6
5.1
67.5
120.99
23.43%
7.27%

X. Appendix: Valuation
Multiples Valuation Comps
Company

Enterprise

Name

Value

Revenue (USD)
2013A

2014A

2015E

New Grace Comps

Albemarle Corporation (NYSE:ALB)


Johnson Matthey plc (LSE:JMAT)
Clariant AG (SWX:CLN)

EBITDA (USD)
2013A

2014A

EV/EBITDA
2015E

2013A

2014A

2015E

6,505.5 2,519.2 2,394.3 2,445.5 705.4 428.7 899.7


11,512.2 16,071.3 16,710.0 15,661.9 781.0 860.7 863.0
8,112.6 6,390.2 6,432.3 6,261.8 820.3 833.0 894.4

9.22x
14.74x
9.89x

15.17x
13.38x
9.74x

7.23x
13.34x
9.07x

2,021.6 1,199.7 1,226.8 1,192.6 172.1 183.9 186.5


9,419.4 5,408.1 5,859.4 5,833.3 697.8 823.3 901.3

11.75x
13.50x

10.99x
11.44x

10.84x
10.45x

New GCP Comps

Forbo Holding AG (SWX:FORN)


Sika AG (SWX:SIK)

23

X. Appendix: Valuation
Operating Model Base Case
2 0 10 A

Revenue
Refining Catalysts
Growth Rate %
Polyolefin and Chemical Catalysts
Growth Rate %
Catalysts Technologies
Growth Rate %
Materials Technologies
Growth Rate %
Revenue
Construction Revenue
Growth Rate %
Total Revenue

2 0 12 A

2 0 13 A

2 0 14 A

2 0 15 E

2 0 16 E

2 0 17 E

2 0 18 E

2 0 19 E

2020E

2 0 2 1E

2675.0

1077.5
45.2%
269.8
12.3%
1347.3
37.2%
872.6
6.5%
2219.9
992.0
13.6%
3211.9

986.8
-8.4%
281.3
4.3%
1268.1
1.0%
862.6
1.0%
2130.7
1024.8
3.3%
3155.5

832.4
-15.6%
291.6
3.7%
1124.0
-11.4%
878.5
1.8%
2002.5
1058.2
3.3%
3060.7

845.5
1.6%
401.3
37.6%
1246.8
10.9%
890.6
1.4%
2137.4
1105.6
4.5%
3243.0

873.6
3.3%
445.4
11.0%
1319.0
6.1%
914.9
2.7%
2233.9
1138.8
3.0%
3372.6

903.5
3.4%
489.2
9.8%
1392.8
5.6%
939.8
2.7%
2332.6
1172.9
3.0%
3505.5

935.6
3.5%
531.6
8.7%
1467.2
5.3%
965.4
2.7%
2432.6
1208.1
3.0%
3640.7

969.8
3.7%
571.5
7.5%
1541.3
5.1%
991.7
2.7%
2533.0
1244.4
3.0%
3777.4

1006.4
3.8%
607.7
6.3%
1614.1
4.7%
1018.7
2.7%
2632.9
1281.7
3.0%
3914.5

1045.5
3.9%
639.1
5.2%
1684.6
4.4%
1046.5
2.7%
2731.1
1320.1
3.0%
4051.3

1087.3
4.0%
664.7
4.0%
1752.0
4.0%
1075.0
2.7%
2827.0
1359.7
3.0%
4186.8

288.3
29.3%
191.8
23.4%
-108.1
-6.0%
372.0

441.3
32.8%
189.6
21.7%
-89.1
-4.0%
541.8

447.8
35.3%
191.5
22.2%
-81.2
-3.8%
558.1

381.7
34.0%
213.2
24.3%
-68.4
-3.4%
526.5

444.6
35.7%
217.3
24.4%
-60.6
-2.8%
601.3
18%

483.5
36.7%
224.7
24.6%
-63.4
-2.8%
644.8
199.3
844.1
25.0%
23.7%
1.3%

524.5
37.7%
232.3
24.7%
-66.2
-2.8%
690.6
205.3
895.9
25.6%
24.6%
1.0%

567.2
38.7%
240.1
24.9%
-69.0
-2.8%
738.3
211.4
949.7
26.1%
25.3%
0.8%

595.9
38.7%
248.2
25.0%
-71.9
-2.8%
772.2
217.8
990.0
26.2%

624.0
38.7%
256.6
25.2%
-74.7
-2.8%
805.9
224.3
1030.2
26.3%

651.3
38.7%
265.2
25.3%
-77.5
-2.8%
839.0
231.0
1070.0
26.4%

677.3
38.7%
274.1
25.5%
-80.2
-2.8%
871.2
238.0
1109.2
26.5%

239.6
24.4%
160.0
19.5%
-109.9
-6.1%
89.9

388.8
28.9%
158.7
18.2%
-90.9
-4.1%
97.3
3.0%
-131.5

393.8
31.1%
162.0
18.8%
-82.9
-3.9%
125.2
4.0%
-122.8

327.5
29.1%
181.8
20.7%
-72.1
-3.6%
151.7
5.0%
-110.2

378.3
30.3%
185.2
20.8%
-65.2
-3.1%
161.7
5.0%
-99.0

409.4
31.0%
191.8
21.0%
-68.2
-3.1%
168.2
5%
-103.0
-3.1%
666.5
199.9
533.1

442.1
31.7%
198.7
21.1%
-71.2
-3.1%
174.9
5%
-107.0
-3.1%
708.6
212.6
569.6

476.0
32.4%
205.7
21.3%
-74.3
-3.1%
181.7
5%
-111.1
-3.1%
752.3
225.7
607.5

510.8
33.1%
213.1
21.5%
-77.3
-3.1%
188.6
5%
-115.3
-3.1%
797.2
239.2
646.6

534.9
33.1%
220.6
21.7%
-80.4
-3.1%
195.5
5%
-119.5
-3.1%
831.6
249.5
675.2

558.3
33.1%
228.4
21.8%
-83.4
-3.1%
202.5
5%
-123.7
-3.1%
865.5
259.7
703.4

580.6
33.1%
236.5
22.0%
-86.3
-3.1%
209.3
5%
-127.8
-3.1%
898.7
269.6
730.8

742.0
240.3
982.3
819.4
1801.7
873.3

EBITDA
Catalysts Technologies
Margin %
Materials Technologies
Margin %
Corporate
Margin %
New Grace EBITDA
Construction EBITDA
Total EBITDA
Margin %
Consensus Margin %
Difference
EBIT
Catalysts Technologies
Margin %
Materials Technologies
Margin %
Corporate (New Grace)
Margin %
Construction Products
Margin %
Corporate (Full)
Margin
Total EBIT
US EBIT
EBIT on New Grace

2 0 11A

-163.1

626.2
30.0%
289.7

1. Tax Savings = Change in NOL Balance * Regular Federal Tax Rate

456.6

472.9

437.2

24

498.3

X. Appendix: Valuation
Operating Model NOLs
N O L D C F

2 0 10 A

2 0 11A

2 0 12 A

2 0 13 A

2 0 14 A

2 0 15 E

2 0 16 E

2 0 17 E

2 0 18 E

2 0 19 E

2020E

2 0 2 1E

2675.0

3211.9

3155.5

3060.7

3243.0

3375.1
667.0
200.1
-59.3
140.8

3511.3
710.0
213.0
-59.3
153.7

3651.0
754.9
226.5
-59.3
167.2

3793.4
801.5
240.5
-59.3
181.1

3937.7
838.2
251.4
-59.3
192.1

4083.3
874.9
262.5
-59.3
203.1

4229.3
911.3
273.4
-59.3
214.1

1800.0
-140.8
1659.2

1659.2
-153.7
1505.5

1505.5
-167.2
1338.3

1338.3
-181.1
1157.2

1157.2
-192.1
965.0

965.0
-203.1
761.9

761.9
-214.1
547.8

35%

35%

35%

35%

35%

35%

35%

Beginning DTA Balance


DTA Change
Ending DTA

630.0
-49.3
580.7

580.7
-53.8
526.9

526.9
-58.5
468.4

468.4
-63.4
405.0

405.0
-67.2
337.8

337.8
-71.1
266.7

266.7
-74.9
191.7

Discount Factor
Discounted Value

0.922
45.4

0.850
45.7

0.784
45.9

0.723
45.8

0.666
44.8

0.614
43.7

0.566 Remaining Value


42.4
94.4

Revenue
EBIT
US EBIT
Interest Payments
US EBI (Pre-Tax Income)
Beginning US NOL Balance
NOL Carryforw ard Usage
Ending US NOL Balance
Statutory Tax Rate

Discount Rate
NPV of NOLs ($mn)

8.46%
408.1

WACC

Note: Assum ption Justifications


Discount Rate

We use WACC as w e believe it reflects the riskiness of generating shieldable income

US EBIT

We assume that US operations represent 30% of Total EBIT going forw ard, in line w ith recent historicals

Interest Payments

We assume Debt Load as specified by Management Guidance and assume no debt paydow n over forecast period

1. Tax Savings = Change in NOL Balance * Regular Federal Tax Rate

25

X. Appendix: Valuation
DCF Base Case
Taxes Savings
Marginal Tax Rate

49.2
35%

DC F

EBIT on New Grace


Tax Rate
EBI After Tax
Catalysts Technologies
Materials Technologies
Corporate
(+) D&A
NWC
% of Revenues
(-) NWC
(-) Capex
Cash Flow Before Tax Refund
Tax Refund
Free Cash Flow
Discount Factor
Discounted Value
New Grace EV
New GCP EV
Excess Investments
Debt
Total Equity Value
Shares Outstanding
Value Per Share

2 0 10 A

2 0 11A

2 0 12 A

2 0 13 A

2 0 14 A

289.7

456.6

472.9

437.2

498.3

48.7
31.8
2.6
83.1
289.3
11%
(49.70)

52.5
30.9
2.6
86
387.8
12%
(98.50)

54
29.5
2.6
86.1
353.6
11%
34.20

54.2
31.4
5.7
91.3
240.7
8%
112.90

66.3
32.1
7
105.4
379.2
12%
(138.50)

2 0 15 E

9188.7
1893.9 *Based on m ultiples
673.8 *Unconsolidated affiliate and excess cash
2015.8
9740.7
67.5
144.31

53.6
35%
2 0 16 E

58.2
35%
2 0 17 E

62.9
35%

66.6
35%

2 0 18 E

2 0 19 E

70.1
35%
2020E

533.1
35%
346.5

569.6
35%
370.2

607.5
35%
394.9

646.6
35%
420.3

675.2
35%
438.9

703.4
35%
457.2

111.8
394.4
12%
(15.16)
-83.8
359.3
49.2
408.5
0.922
376.6

121.0
409.9
12%
(15.54)
-90.8
384.9
53.6
438.6
0.850
372.8

130.8
425.7
12%
(15.81)
-98.1
411.8
58.2
470.0
0.784
368.3

125.7
441.7
12%
(15.98)
-94.2
435.7
62.9
498.6
0.723
360.3

130.7
457.7
12%
(16.04)
-98.0
455.5
66.6
522.1
0.666
347.8

135.6
473.7
12%
(15.99)
-101.7
475.1
70.1
545.2
0.614
334.9

73.6
35%
2 0 2 1E

0.0
35%

0.0
35%

CV

730.8
35%
475.1

140.4
489.6
12%
(15.84)
-105.3
494.3
'21
73.6 Term inal Value
567.9
11843.1
0.566
0.566
321.6
6706.4

Grow th
3.50%

Key DCF Metrics


Equity Beta

1.066

Beta After Mean Reversion

1.044

Yield on 10% Treasury Note

0.023

Equity Cost of Capital

9.6%

Debt Cost of Capital

4.05%

Market Cap

7218.8

Total Enterprise Value

8683.2

Net Debt

1464.4

WACC

8.46%

L+350

Note: Assum ption Justifications


Refining growth

"Petroleum refining market expected to grow at 2.7% according to HIS Chemical". We estimate Grace's competetive advantages to enable stronger market share capture

Polyolefin/Chemical Catalysts growth

"Propylene Market grow ing at ~11% CAGR and longer term at 5% according to Nexant Technologies Prospectus"

Materials growth

"Grace CEO on Q4 call: seeing strong signals in Materials tech". Our conservative estimates used here at ~ developed economies GDP Grow th

Operating Margins

Based on strong pricing environment and low input costs w e are estimating persistance in margins going forw ard for the value-added new Grace segments

1. Tax Savings = Change in NOL Balance * Regular Federal Tax Rate

26

X. Appendix: Valuation
DCF Downside Case
DC F

2 0 10 A

2 0 11A

2 0 12 A

2 0 13 A

2 0 14 A

2 0 15 E

2 0 16 E

2 0 17 E

2 0 18 E

Total Revenue
growth %

2675.0

3211.9
20.1%

3155.5
-1.8%

3060.7
-3.0%

3243.0
6.0%

2762.0
-14.8%

2615.3
-5.3%

2759.2
5.5%

3200.6
16.0%

EBITDA
margin %

372.0
13.9%

541.8
16.9%

558.1
17.7%

526.5
17.2%

601.3
18.5%

275.3
10.0%

375.5
14.4%

401.9
14.6%

511.2
16.0%

EBIT on New Grace


margin %

289.7
10.8%

456.6
14.2%

472.9
15.0%

437.2
14.3%

498.3
15.4%

185.6
6.7%

285.8
10.9%

312.2
11.3%

421.4
13.2%

EBIT on New Grace


Tax Rate
EBI After Tax
(+) D&A
% of Rev
(-) NWC
(-) Capex
Free Cash Flow
Discount Factor
Discounted Value
New Grace EV
New GCP EV
Excess Investments
Debt
Total Equity Value
Shares Outstanding
Value Per Share

289.7

456.6

472.9

437.2

498.3

83.1
3.1%
-49.7

86
2.7%
-98.5

86.1
2.7%
34.2

91.3
3.0%
112.9

105.4
3.3%
-138.5

185.6
15.0%
157.7
89.8
3.3%
56.25
-89.8
214.0
0.922
197.3

285.8
15.0%
242.9
89.8
3.4%
17.15
-89.8
260.1
0.850
221.1

312.2
15.0%
265.3
89.8
3.3%
(16.82)
-89.8
248.5
0.784
194.8

6062.9
1820.3 *Based on m ultiples
673.8
2015.8
4720.9
67.4
70.07

CV

421.4
15.0% *NOL Projection
358.2
89.8
2.8%
(13.10)
'18
-89.8 Term inal Value
345.1
7197.2
0.723
0.723
249.4
5200.4

Grow th
3.50%

Key DCF Metrics

Note: Assum ption Justifications


Revenue Growth
Recession metrics from 2009 and 2010 Applied to FY15 and FY16
EBIT Margins

Recession + Post Recession margins applied to projection period

Tax Rate

Estimates tax rate using NOL Carryforw ards to shield income. Based on Management guidance

Perpetuity Grow th

Reasonable perpetuity grow th of global GDP

27

Equity Beta

1.066

Beta After Mean Reversion

1.044

Yield on 10% Treasury Note

0.023

Equity Cost of Capital

9.6%

Debt Cost of Capital

4.05%

Market Cap

7218.8

Total Enterprise Value

8683.2

Net Debt

1464.4

WACC

8.46%

L+350

X. Appendix: Valuation
DCF Sensitivities
Base Case Sensitivity

Bear Case Sensitivity

WACC
9.5%
9.0%
8.5%
8.0%
7.5%

2.5%
$108.9
$116.8
$126.1
$137.1
$150.2

Terminal Grow th Rate


3.0%
3.5%
$114.3
$120.5
$123.3
$130.9
$133.9
$143.3
$146.7
$158.5
$162.3
$177.5

WACC
9.5%
9.0%
8.5%
8.0%
7.5%

2.5%
11.1%
19.2%
28.6%
39.8%
53.3%

Terminal Grow th Rate


3.0%
3.5%
16.6%
22.9%
25.8%
33.5%
36.6%
46.2%
49.7%
61.7%
65.6%
81.1%

4.0%
$127.9
$140.0
$154.8
$173.2
$196.9

4.5%
$136.8
$151.1
$169.1
$192.1
$222.9

WACC
9.5%
9.0%
8.5%
8.0%
7.5%

2.5%
$45.3
$50.5
$56.6
$63.9
$72.6

Terminal Grow th Rate


3.0%
3.5%
4.0%
$49.3
$53.9
$59.5
$55.3
$60.9
$67.6
$62.4
$69.3
$77.7
$70.9
$79.5
$90.2
$81.3
$92.3
$106.3

4.5%
$66.1
$75.9
$88.2
$104.0
$125.1

4.0%
30.5%
42.8%
57.9%
76.7%
100.9%

4.5%
39.5%
54.2%
72.5%
96.0%
127.4%

WACC
9.5%
9.0%
8.5%
8.0%
7.5%

2.5%
(52.7%)
(47.3%)
(40.9%)
(33.3%)
(24.2%)

Terminal Grow th Rate


3.0%
3.5%
4.0%
(48.5%)
(43.7%)
(37.9%)
(42.3%)
(36.4%)
(29.4%)
(34.9%)
(27.7%)
(18.9%)
(26.0%)
(17.0%)
(5.8%)
(15.1%)
(3.7%)
11.0%

4.5%
(31.0%)
(20.7%)
(7.9%)
8.6%
30.6%

28