Not All Chemical Companies Are Created Equal

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Taminco (NYSE: TAM) is the largest producer of alkylamines and alkylamine derivatives globally. Listed in April 2013, it announced in July 2013 that it became a member of the broad-market Russell 3000 and Russell Global Indexes.

Alkylamines have more favorable dynamics than other types of amines

Amines, organic compounds which are derivatives of ammonia, are used in many applications such as dyes, drugs, and gas treatment. But, different types of amines such as alkylamines, ethyleneamines, and ethanolamines sport varying characteristics, which are a key determinant of margins for their respective producers. Taminco enjoys better margins than producers of other amines for a few reasons.

Firstly, the ease of transportation is a key factor in assessing the threat of foreign exports to domestic producers. For example, domestic cement producers are relatively immune to foreign competition because of the high weight-to-value ratio of cement. In Taminco’s case, the volatile nature of methylamines, the largest alkylamine product category, makes transportation over long distances inefficient. In contrast, the threat of foreign competition is greater for ethyleneamines and ethanolamines, which are more suitable for transport because of their relatively more stable nature.

Secondly, the resilience of a company’s customers and their businesses is at times more important than the strength of the company itself, with customer defaults and bankruptcies contributing to the downfall of many companies. For example, commodity surfactants, gas treatment, and metalworking fluids account for close to half of the end-markets for ethanolamines. In comparison, Taminco’s alkylamines and alkylamine derivatives products serve diverse end markets with growth potential such as agriculture, animal nutrition, and water treatment.

Last but not the least, the alkylamines market is less competitive, with Taminco as the market leader with about 50% market share in both North America and Europe. In contrast, the other amine markets are more fragmented, with more low cost foreign competition given the relative ease of transportation.

Margin stabiity

Taminco has delivered adjusted EBITDA margins consistently above 20% for the past four fiscal years from 2009 to 2012. There are two key factors contributing to this margin stability.

One factor is that Taminco’s customers are less price sensitive. This is because Taminco’s products typically account for a small proportion of their customers’ total costs. In addition, for most of the chemical products that its customers produce, there are few viable alternatives to alkylamines and alkylamine derivatives as product inputs. This is reflected in the length of its customer relationships, with its key customers having worked with Taminco for more than a decade.

The other factor is the way that Taminco structures its contracts to mitigate raw materials cost volatility. Half of Taminco’s contracts are cost pass-throughs; while the pricing for market-based sale contracts is renegotiated either quarterly or monthly.

Growth drivers

Going forward, there are two key growth drivers for Taminco: firstly, secular growth in its end-markets and secondly, the expanded capacity from new investments.

Taminco derived 30%, 15%, and 13% of its fiscal 2012 revenue from end markets such as agriculture, animal nutrition, and water treatment, respectively. Trends like a higher population-to-arable land ratio, a healthy diet with a preference of white meat over red meat, and increased demand for clean water will ensure a base level of demand and revenue growth for Taminco.

Taminco is also investing in new capacity to support future demand. One example is the start-up of an AlkylAlkanolAmines (AAA) unit in Nanjing in December 2012, serving the water treatment, personal & home care, and energy markets. Previously, Taminco met demand in the Asian region by exporting from Europe. Taminco is also planning to expand domestic methylamines capacity by the third quarter of 2014.

Management did not give specific guidance, but mentioned that full year fiscal 2013 adjusted EBITDA should be another record for Taminco this year. In the first quarter of fiscal 2013, net sales and volume grew 10% and 7% year-on-year, respectively, to $314 million and 144 tonnes, respectively.

Peer comparison

Taminco’s peers include The Dow Chemical Company (NYSE: DOW) and Huntsman (NYSE: HUN). They are producers of ethyleneamines and ethanolamines.

The Dow Chemical Company is the second-largest chemical company globally and it is a key customer of Taminco’s agriculture end market. Its top line remained flat for the first quarter of 2013, with sales and volume down 2% and 3% year-on-year, respectively, reflecting the impact of slower growth. Looking forward, Dow Chemical has set itself a target of $1.5 billion of sales proceeds from divestitures to optimize its portfolio and strengthen its balance sheet by reducing debt.

The divestment of its polypropylene licensing & catalyst and plastic additives businesses by the end of 2013 are expected to be key contributors. I prefer Taminco over Dow Chemical to gain exposure to the more favorable dynamics of the alkylamines market.

Huntsman is a global manufacturer of differentiated chemicals and is one of the largest customers for Taminco’s personal & home care segment. It reported a net loss of $24 million for the first quarter of 2013 due to lower titanium dioxide prices, resulting in a 22% fall in its pigments segment business. This was partially offset by higher earnings from its polyurethanes segment. I am negative on Huntsman, as it has a significant exposure to cyclical end markets such as construction, automotive, and textiles, unlike Taminco’s relatively more stable end-markets.

Conclusion

Taminco’s superior margins vis-à-vis other specialty chemical companies seem to have been factored into its share price. As such, I would wait for a pullback before initiating a position.

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