The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports. If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.
UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:
- Baxter International Inc. (BAX) / Vantive – 2Q 2024
- Jacobs Solutions Inc. (J) / Critical Mission Solutions – 3Q 2024
- Western Digital (WDC) / HDD Business – 2H 2024
- MDU Resources Group (MDU) / Construction Services – 2H 2024
- Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 2H 2024
- Select Medical Holdings Corp. (SEM) / Concentra Business – 2H 2024
- Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
- DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
RECENT PUBLICATIONS:
MDU Resources Group Inc. (MDU)
June 10, 2024
On November 23, 2023, MDU Resources Group Inc. (NYSE: MDU) announced that its Board of Directors approved a plan to separate the construction services business into a standalone, publicly traded company, via a spin-off. Following the separation, MDU Resources will become a pure-play regulated energy delivery company. The transaction is targeted to be completed in late-2024. The standalone Construction services company will adopt the corporate moniker Everus Construction Group. MDU management has not ruled out retaining an ownership stake in Everus similar to what was done with the Knife River transaction.
The final deconstruction of MDU returns the company to its roots as a pure play energy delivery and distribution company with significant scale. It plans to invest $2.7 billion into regulated infrastructure over the next five years that will deliver earnings growth. As a utility, the company should be able to generate stable cash flow, and earnings growth from system replacement and expansion, particularly in relation to the electric transmission system. Tailwinds from government infrastructure spending and new high-volume electric customers, such as data centers, combined with approximately 80% of utility revenue being fixed augers well for stable earnings and cash flow growth at the post-spin MDU. Management has stated that MDU will maintain its long-term dividend payout policy of 60% to 70% of regulated earnings, and has indicated that there are no foreseeable equity issuance needs prior to 2027.
For its part, the Construction Services business is positioned to capitalize on government infrastructure spending and deliver earnings growth at or above that of the utility business. For reference, the current segment has grown EBITDA at a 17% CAGR since 2018, while requiring minimal capital expenses (<2% of revenue) allowing for business reinvestment and potential acquisitions. Notably, the segment has a current backlog (as of the March 2024) of $2.2 billion, of which $1.85 billion is related to electrical and mechanical work.
Given the current trading multiple of MDU, it implies that following the spin-off, shares of Everus should be re-rated higher to approximate that of E&C peers, while a corresponding reduction in trading multiples at the utility company does not seem likely. Under this scenario, the transaction appears to be poised to unlock value when considering the growth prospects for both post-spin companies.
We fairly value MDU at $31 per share, 28% above the current share price. This consists of approximately $16 per share in value from Everus and $15 per share from the remaining regulated businesses. Given the implied upside to our fair value from the current share price, we rate pre-spin shares of MDU at BUY. We note that both post-spin companies’ ability to grow earnings are supported by macro trends, including large government spending from the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act, customer and rate base growth from regulatory friendly jurisdictions, which provide an attractive investment opportunity at the current pre-spin share price.
ALERT: DUPONT TO SEPARATE INTO THREE INDEPENDENT COMPANIES VIA SPIN-OFFS
May 23, 2024
On May 22, 2024, DuPont Inc. (NYSE: DD) announced its intention to separate into three independent publicly traded companies via tax free spin-offs of its Electronics and Water businesses. The separations are expected to be completed in 18 to 24 months.
The company generated $12.1 billion in revenue and $2.9 billion in operating EBITDA in 2023. It reports under two segments: Electronics & Industrial (44% of 2023 sales), and Water & Protection (47% of 2023 sales). (Corporate and other account for the remaining ~9% of sales.)
Electronics & Industrial (E&I) provides a broad portfolio of materials and components used in high performance computing, electric vehicles, and mobile devices, amongst others, to the aerospace, defense, transportation, healthcare and medical device industries.
Water & Protection (W&P) provides engineered products and integrated systems across multiple industries including worker safety, water purification, transportation, energy, and medical packaging, amongst others. W&P business lines include Safety Solutions, Shelter Solutions, and Water Solutions.
The New Electronics company will be comprised of the current Semiconductor Technologies and Interconnect Solutions businesses (currently in E&I), as well as certain electronics related businesses from the current Industrial Solution business. Applications to be controlled by the New Electronics company include integrated circuit fabrication for memory and logic semiconductors, as well as printed circuit board, electronic and industrial finishing.
The New Water company will control the current Water Solutions business line (currently in W&S) and offers products and solutions for water filtration, purification, reverse osmosis, ion exchange, and ultrafiltration.
Following the separation, the parent DuPont company, New DuPont, will remain a diversified industrial company controlling a range of material science and application expertise with well-known brand names such as Tyvek, Kevlar, and Nomex. End market exposure is expected to focus on healthcare, and electric vehicles, while remaining an active participant in the safety, construction, and aerospace end markets, amongst others. Absent New Electronics, and New Water’s contribution, New DuPont would have generated $6.6 billion in revenue and operated with an approximate EBITDA margin of 24% in 2023.
In terms of rationale, investor appetite for more specialized companies may result in an unlocking of value. New Water and New Electronics should exhibit faster growth rates than the current conglomerate and a set of focused peer comps currently trade at higher forward multiples than the current DD. Water peers trade at approximately 19.5x forward EBITDA estimates, and Electronic peers trade at 22.5x forward EBITDA. DD currently trades at 13.0x forward EBITDA, which is roughly in line with other diversified industrial companies.
Management issued 2024 guidance that includes revenue between $12.1 and $12.4 billion, and EBITDA between $2.9 and $3.05 billion. At the midpoint, this implies a 2.5% decline in revenue and a 1.1% increase in EBITDA. Management cites improving trends in electronics, and reduced channel destocking in their guidance. Based on 2023 revenue and EBITDA margins, and assuming a modest recovery starting in 2H 2024 and continuing through 2025, its reasonable the post spin companies will earn $1.5 billion, $1.1 billion, and $355 million in respective 2025 EBITDA for New DuPont, New Electronics, and New Water. Valuing each piece at a slight discount to their respective peer set, and incorporating current net debt and shares outstanding, on a preliminary sum-of-the-parts basis, shares of pre-spin DuPont could be assigned a fair value estimate of $90 per share (12% upside from the current DD share price).
RADAR SCREEN – NEW ADDITION: NETGEAR (NTGR)
June 3, 2024
NETGEAR, Inc. (NASDAQ: NTGR), a global networking company, could, under recent pressure from activist-investor Windward Management (currently a ~4.2% holder) as well as the leadership of a new chief executive, evaluate a range of strategic options, including a material repurchase of company shares as well as the separation of its NETGEAR for Business (NFB) segment (from the core-Connected Home business).
The investor reportedly contends that with ~80% of the company’s market capitalization in net cash the company’s most recent free cash flow guidance implies a “de minimis, to potentially negative enterprise value by year end”. Specifically, Windward recommends the company increases its share repurchase authorization to “at least $100 million” as well as to create a strategic review committee to explore the separation of its Connected Home and NETGEAR for Business (NFB) segments.
Currently, NTGR reports two segments: (1) Connected Homes (60% of consolidated sales and ~25% in total contribution margin); and (2) NETGEAR for Business or NFB (40% of sales and ~75% in contribution margin). The company recently withdrew the full-year 2024 financial guidance it articulated at its Investor Day in December 2023, which we note was issued under the previous leadership of co-founder Patrick Lo and called for full-year operating margin of 1%-4% with year-over year free cash (FCF) growth of 200%-400% and a tax rate of ~24%. The long-term target model projected mid-single digit annual revenue growth, a gross margin of 40%-plus, double-digit non-GAAP operating margins and low double-digit non-GAAP EPS growth. That said, on the most recent 1Q 2024 earnings conference call the new management team, led by Charles Prober, the company issued narrower quarterly guidance calling for 2Q 2024 sales of $125-$140 million.
It could be projected that the CH and NFB segments generate adj. EBITDA of ~$21 million and ~$56 million, respectively. Publicly traded peers to the Connected Homes segment could include, D-Link Corp (2232 TT), Eero (NASDAQ: AMZN), Linksys (601138 CH), Minim (NYSE: MSI), Google WiFi (NASDAQ: GOOG), and Samsung (005930 KS), which trade at ~11x 2025E EV/EBITDA. Applying a 7.5x multiple to 2025E EBITDA implies a segment value of $155.1 million. Publicly traded peers to the NETGEAR for Business (NFB) include Cisco Systems (NASDAQW: CSCO), Dell Technologies (NASDAQ: DELL), Extreme Networks (NASDAQ: EXTR), Fortinet Inc. (NASDAQ: FTNT), Hewlett Packard Enterprises (NYSE: HPE), and Palo Alto Networks (NASDAQ: PANW), which trade at ~15x 2025E EV/EBITDA.
Applying a 10x multiple to 2025E EBITDA implies a segment value of $557.8 million. Accounting for corporate costs, capitalized at ~7.5x, as well as projected net cash yields a sum of the parts value of $435.2 million or $15 per share (based on a diluted share count of $29.4 million).
Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event
Companies discussed this month: Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), Goodyear Tire & Rubber, Inc. (FLT), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), NETGEAR, Inc. (NTGR), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)*, TFI International (TFII), TriMas Corporation (TRS)
*New Entry this Month
Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.
Murray Stahl’s commentary on various investing themes and single stock recommendations.
Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe.
Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.
Product Specialist
Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566
