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Report: PPG Divestitures ‘Sensible Despite a Dime of Dilution’

By: Catherine Diamon

According to a recent report by Vertical Research Partners, PPG continues to upgrade its portfolio by subtraction. PPG has agreed to divest two additional non-core businesses in recent days: the remainder of its fiberglass operations in the US as well as a small plasterboard and cement-board business that came along with PPG’s prior acquisition of Comex (Mexico) in November 2014. We view the moves favorably for three reasons: (1) we consider it to be a seller’s M&A market and the multiple on fiberglass appears attractive at >10x; (2) the actions perpetuate an ongoing trend of upgrades to PPG’s portfolio quality via subtraction, which serves to increase focus on PPG’s core coatings business; and (3) the moves further strengthen the company’s balance sheet, which could facilitate more rapid execution of PPG’s existing plan to deploy $2.5-3.5bn of capital over the next two years. Indeed, we believe the latter issue will be a prime topic of interest for investors in the wake of PPG’s withdrawal from the pursuit of Akzo on 1 June.

We project EPS dilution at a rate of $0.10+ per annum. We decrease our 2017 EPS estimate by $0.08 to $6.22, including $1.88E for 2Q17 down from $1.91E previously. Likewise, we trim our 2018 EPS estimate by $0.10 to $6.60 from $6.70. Our price target remains unchanged at $123, which implies total upside potential of 13%, including a dividend yield of 1.4%. PPG now trades at a 2017 P/E multiple of 17.8x, which represents a discount of 4.2x or 20% vs. the average of three US coatings peers (SHW, AXTA and RPM). Importantly, this discount would widen to ~30% pro forma for deployment of PPG’s excess capital vs. coatings peers. As a reminder, our valuation of PPG is based on an average of two methodologies: DCF analysis and a relative P/E framework. Our DCF analysis suggests a warranted stock price of $124. Using our relative P/E framework wherein we apply a 10% premium to the S&P500 multiple, we calculate warranted value of $122 per PPG share. 

Background: On 26 May PPG announced the last of a long line of Glass divestitures: a definitive agreement to divest its US fiberglass operations to Nippon Electric Glass Co. Ltd. (NEG) for $545mn. We expect this deal to close in 3Q17, although PPG will reclassify the business as a discontinued operation for 2Q17. We had this business generating 2017 sales of $342mn with associated EBITDA of $51mn, which would apply a multiple of 10.7x 2017E EBITDA (estimate, multiple not disclosed). We believe the business had a very low tax basis, so we project after-tax cash proceeds of $350mn. In a separate transaction that closed on 2 June, PPG completed the sale of Plaka (plasterboard and cement-board) to Knauf International GmbH. Financial terms were not disclosed, but we estimate that Plaka contributed sales of $30mn to PPG’s Performance Coatings segment with associated EBITDA of ~$3mn. 

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