Sisecam - Recovery and Restructuring with Risks to the Upside

Solid recovery in global manufacturing

High frequency data is consistent with a strong recovery in global manufacturing led by the United States. Industrial commodity prices have rebounded, assembly lines are reverting back to normal and demand for container ships is rising. Loose monetary policy should continue well into 2021 and most likely through 2022, which should help boost activities in cyclical industries and housing sector.

Glass industry and Sisecam set to benefit

Exposure to both enterprises and households makes glass manufacturing all the more attractive for investors looking to position for recovery in demand. With its global reach and timely consolidation work underway, Sisecam should top the list of glassmakers set to benefit from the turnaround.

Share price underrates the outlook

Sisecam’s current equity value is circa TL15B while the estimated value of non-equity claims on the firm’s assets is circa TL7B using June 2020 financial statements. The 2021 outlook on our assumptions of recovery in European and Turkish GDP is as follows -with plus and minus 10% risk. We factor in net sales revenues of TL28B (+/- 10%) with TL5.8B in operating EBITDA (+/- 10%). On these estimates, Sisecam’s one-year forward EV/EBITDA ranges between circa 3.4x and 4.2x while the EV/Sales multiple range reads between 0.71x and 0.86x.

Sisecam v Saint-Gobain

These multiples point to 40-50% discount in comparison to Saint-Gobain’s low-cycle multiples. Saint-Gobain shares have reacted positively to June earnings but the multiples are still depressed largely due to 2Q-3Q contraction in France. It is conceivable, however, Saint-Gobain shares go thru another round of “rerating” in December quarter as France outlook catches up with the rest of Europe and the Americas.

Saint-Gobain is not an ideal comp for Sisecam because the latter has a less-cyclical revenue mix. Sisecam’s portfolio of customers/end users, at most 40% of which we would classify as cyclical, is certainly more balanced than that of Saint-Gobain. Yet, Saint-Gobain is a closely-followed company widely held by institutional funds (over 80% of shares) and hence has an “intelligent” share price. Saint-Gobain’s outlook for its architectural glass business gives us some context for Sisecam’s own operating outlook and relative values.

Risks tilted towards the upside

Sisecam’s cyclical businesses generated 40% of sales but a lower 25% of EBITDA in 1H20. Less cyclical businesses, in particular glass packaging division, should be on the driving seat leading growth for at least two quarters out. In a more balanced year, cyclical/construction/architectural glass related businesses would/should command 35-40% of EBITDA, which is where, in our view, the upside risk lies. There is significant pent-up demand which should resurface from 2Q21 onwards. Favorable operating leverage should widen margins further and boost earnings in the latter part of 2021 and 2022.

What is the downside risk? There is some protection against cyclical downturns as 60% of Sisecam’s business is fairly defensive even somewhat counter cyclical. However, if the cycle were deeper or it lasted longer than usual, remaining 40% could depress the group revenues and upset earnings.

Delisting on track for October

Consolidation of all operational assets is work in progress. Delisting of group companies whose shares are listed on Borsa Istanbul is scheduled to take place next month as announced previously. No financial statements for the New Sisecam are published yet. 2020 will be the first full year of reporting Sisecam as an operating company while 2021 will be the first full year of operations for New Co.

This is not an investment recommendation

This short commentary is not meant to be an investment idea. It is just an opinion about a business the author follows. Stock investment is risky. Do your own research or talk to someone who does.