APD – VSM = 23% upside

January 19, 2017 01:00 PM
The spin-off investment strategy has beaten the S&P by an average of 10% per year over the last decade. Timely tips from the spin doctor...
APD – VSM = 23% upside

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Versum Materials (VSM), with a market capitalization of $2.7 billion, enables chipmakers to achieve higher performance at lower cost with enhanced reliability. Versum is a leading global provider of electronic materials for the integrated circuit and flat-panel display markets. It supplies specialty chemicals and materials, high purity specialty gasses, proprietary delivery systems and related services. The semiconductor industry accounts for 85% of its sales.  Versum was spun off from parent Air Products (APD) and began trading as an independent public company on Oct. 3. 

Versum has approximately 1,900 employees and major production facilities in the United States, Korea and Taiwan. Versum’s focus is to be the materials partner of choice for the semiconductor industry, providing low-cost/high-value in-use products for next generation chips used in mobile devices, Internet of Things and personal computers. In fiscal year 2016, Versum Materials posted revenues of $970.1 million.
For fiscal year 2017, Versum expects sales in the range of $990 million to $1.05 billion, on the back of increasing memory and VNAND demand, acceleration of advanced logic devices and the continued increase in capital spending by the semi-conductor industry. 

The company expects adjusted EBITDA for fiscal year 2017 to be in the range of $330 to $350 million. The EBITDA guidance excludes $20 to $25 million of estimated one-time stand-up costs related to the implementation of its own enterprise resource planning system and relocation of some of the personnel to company sites. The company expects to incur capital expenditures in the range of $75 to $85 million.

We value Versum Materials at $30 per share based on 2017 estimates enterprise value to EBITDA multiple of 11.5x (see “Key data race”). Our target price offers an upside of 23% from the current market price of $24.46 as of Dec. 2, 2016 (see “Versum on its own”).

About the Author

Joe Cornell is a chartered financial analyst, a finance MBA and the author of McGraw-Hill’s “Spin-Off To Pay-Off.” As the founder and publisher of Spin-Off Research (www.spinoffresearch.com) he is widely-regarded to be among the foremost experts in this specialized area. @spinoffresearch