-
W.R. Grace Corporation (NYSE: GRA)
May 4th, 2015
Mitesh Amarthaluru (Duke 17), Venkata Amarthaluru (Wharton 15,
Engineering 15), Nicholas Liu (Wharton 15, Engineering 15), John Lu
(Wharton 15, Engineering 15), Anubhav Maheshwari (Wharton 15,
Engineering 15) Video Pitch Link: http://tinyurl.com/WRGrace
Current Price (5/1/15): $97.50 Price Target: $137.30
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2
Industrials Company operating in catalyst technologies,
materials technologies, and construction products Exited Chapter 11
on Feb. 3, 2014 after 13 years in bankruptcy due to asbestos
litigation Management has announced plan to spin-off Graces
construction products business in 2016 with New
Grace retaining the catalysts technologies and materials
technologies businesses Idea Generation: Circle of Competence 1.
Industrials Sector 2. Special Situations 3. Engineering Expertise
Operating Segments Catalyst Technologies: Largest player (33%
share) in oligopolistic industry with secular tailwinds
Construction Products: 2nd largest player (8% share) for concrete
admixtures industry, Largest player (18%
share) for cement additives; industry fragmentation resulting
from localized monopolies
I. Company Overview
Financials Current Price $97.50
Market Cap $7.0bn
Enterprise Value $8.5bn
EBITDA Margin (2014) 17.8%
EV/TTM Adj. EBITDA 11.2x
EV/(EBITDA-Capex) 13.1x
As of May 1st, 2015
2012 Sales Breakdown 2014 Revenue and EBIT Breakdown
Business Description
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3
1. Grace operates in an oligopolistic industry with high
barriers to entry, market share stability, and high ROIC
levels.
2. Grace maintains a deep competitive moat and recession
resistant business due to customer captivity, specialized products,
and technical expertise.
3. Consensus mispricing exists in the marketplace because of
Graces post-bankruptcy status, understatement of excess assets, and
overlooked margin improvement potential.
4. There are clear pathways to value realization from the
upcoming spinoff, effective capital allocation, and increased
investor transparency.
Recommendation: Buy Grace stock pre-spin with the intention of
selling Grace Construction Products stock following its spin-off in
2016 and hold New-Grace over at least a 3 year period to realize a
projected asymmetric equity upside of 40.08%.
II. Investment Thesis
W.R. Grace is a recession-resistant cash compounder with clear
paths to value realization.
SOTP Equity Value 109.84$ 137.30$ Cumulative Upside 12.06%
40.08%Value CAGR over 3 Years 3.87% 11.89%
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4
W.R. Grace is the market leader in an oligopolistic industry
where the top 4 players have 89.2% market share
Barriers to Entry Economies of Scale: 45% of cost structure
is
fixed, providing high operating leverage Demand Side Barriers:
Customer specific
products create high switching costs Technology Barriers:
Specialized technology
with continued R&D investment necessary
III. Industry Overview: Catalyst Technologies
Oligopoly with high barriers to entry Pricing discipline in
oligopoly
Catalyst technologies companies limit capacity expansion to 1-2%
per year with a focus on value accretive pricing
Increasing pricing allows a more effective EBITDA lift
increasing volume
Albemarle attempted volume competition in 2012-2013
unsuccessfully and recognizes importance of pricing discipline.
Anonymous, Goldman Sachs Equity Research Analyst
Current AdditionalSales Capacity
Capacity (thousand tons) 444.5 163.5(x) Utilization 85.0%
85.0%
Volume 377.8 139.0Price ($/ton) $3,300.0 $2,970.0
Revenue $1,246.8 $412.8Price Change (10.0%)
EBIT Loss ($124.7) $124.7EBIT Margin 30.2%
Price Decrease (10.0%)Additional Capacity Necessary 36.8%
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5
1. Market shares for oligopolistic players have shifted by less
than 5% since 2010
2. Adj. ROIC (5 year average) of 31.5% for Catalyst division
consistently exceeds 8.5% cost of capital
3. Value enhancing pricing industry structure where price is not
sacrificed for market share increase
III. Industry Overview: Catalyst Technologies
Operational Segment ROIC: Catalyst technologies
outperformance
Evidence of barriers to entry Refining catalyst market share
stability
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6
W.R. Grace benefits when crude prices fall and experience
limited effects when prices rise.
III. Industry Overview: Macro View
Crude Price v. Refinery Utilization GRA Sales v. Refinery
Utilization
Crude Price v. GRA Sales 3 Year Avg. Correlation v. Time
1. Compiled using US Energy Information Administration
Statistics (LWC Estimates)
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7
Long Standing Customer Relationships: Extended 3 year contract
life for catalysts Customer renewal rate of 70% at contract
completion(1)
Largest customers have specialized products and have worked with
Grace for decades
Products are non-substitutable to customers and small percentage
of cost:(2)
Essential input for crude breakdown and specialized to
customers
For refining catalysts, for barrel of oil refined, $0.15-$0.25
in catalyst cost
With total refinery cost of $4.75 per barrel, catalyst cost
represents ~4.2% of total costs in the refinement process(3)
1% of cement producers costs are additives
IV. Business Model: Competitive Advantages
Customer Stability Leading Market Positions
Focus on core competencies has enabled Grace to become a market
share leader in its products
2008 2014FCC HPC EB Resid HPC FB Resid HPC Distillate HPC
Hydrocracking Polyethylene (PE) Catalyst PE Catalyst Support
Polypropylene (PP) Catalyst PP Process Technology Licensing PE / PP
Single Site Catalyst Chemical Catalysts Zeolite Technology Biofuels
Catalysts MTO Catalysts
Legend Market Leader Strong Position Developing Position No
Position
Source: GRA 2014 Investor Day Presentation
WR Grace Market Position
Fut
ure
Spec
ialty
Ref
iner
y
1. Source: The Catalyst Group 2. Source: Anonymous, W.R. Grace
Finance Manager 3. PBF Energy May 2014 Presentation
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8
Competitive Base W.R. GraceC/O Ratio 6.9 6.4Conversion, wt% 76.0
77.4Dry Gas, wt% 1.0 1.0LPG, wt% 18.3 18.6Gasoline 54.2 55.3LCO,
wt% 17.2 16.9Bottoms, wt% 6.8 5.7
Graces products are non-commodity with individual customer
customization
New catalyst products have research life cycles of at least 1
year
1. Christophe Chau, Rosann Schiller, W.R. Grace Catalagram
Spring 2015
IV. Business Model: Competitive Advantages
Economies of scale from R&D expenditures
Technical Barriers to Entry Technical Advantages
Technical advantages of Graces product results in economic
uplift of $0.40/bbl(1)
Extensive research by my team is necessary to create superior
technology that meets specific needs. Product customization is a
requirement for us to succeed. Anonymous, Senior Principal
Engineer, W.R. Grace
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9
Through the 2008 recession, Grace experienced only a 15% revenue
reduction while increasing operating margins due to pricing
power
Overall improvement in margins since 2010 highlights operating
leverage, sustained ROIC, and nimble supply chains
IV. Business Model: Recession Protection
Recession protection Above-cycle utilization
Industry has a current utilization of 94.6% while normalized
cyclical utilization is 85.0%
Above average utilization allows the business to benefit from
increased operating leverage
Difficulty of supply coming online provides a favorable
supply/demand backdrop (demand expected to grow 3.0% annually)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0
500
1000
1500
2000
2500
3000
3500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$mm
W.R. Grace Key Operating Metrics
Revenue Gross Margin %
EBITDA Margin % EBIT Margin %
Key ValueMarket Size ($mm)* $2,622.0FCC Cost ($/mt)**
$3,300.0Sales Volume ('000s mt) 794.5Annual Capacity ('000s mt)***
839.5Utilization 94.6%Typical Utilization**** 85.0%Deviation from
Norm 11.3%*A lbemarle IR Presentation**C hemical Week***Letzsch C
onsulting****The C atalyst Group
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10
V. Value Drivers: Construction Products Spin-off
1. Spin-off of construction products provides multiple pathways
to value realization.
1. Multiples normalization to industry peers results in 33.2%
upside Specialty Catalysts comps trade at EV/FY14 EBITDA of
8.7-14.0x Construction Products comps trade at EV/EBITDA of
6.7-9.3x Grace trades at EV/EBITDA of 11.2x due to disproportionate
drag from construction On a SOTP+NOL basis, Grace should be trading
at a multiple of 13.0x, an upside of 33.2%
2. Leverage moved to Construction Products spin-off, delevering
New Grace cap structure New Grace is anticipated to have Net
Debt/Adj. EBITDA of 2.0-2.5x, while Grace
Construction Products is projected to have Net Debt/Adj. EBITDA
of 3.0-3.5x
3. Refocused business models Spin-off will allow for investment
decisions to be optimized based on each respective company,
improving management focus and cost productivity
Grace Construction Products requires significantly more capex
relative to New Grace, requiring a different financing model
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11
2. W.R. Grace is properly incentivized to continue implementing
effective capital allocation.
Activist investors own 27.7% shares
Engaged shareholder base improves capital allocation and creates
value enhancement
V. Value Drivers: Effective Capital Allocation
Distressed Activist Ownership Incentivized Management
Share Repurchases Business Reinvestment
In Feb. 2014, the board announced a share repurchase program of
$500mm ending Jan. 2015
In Feb. 2015, the board announced a similar program to buy back
an additional $500.0mm
Graces $557.5mm cash position provides dry powder to execute
share repurchases
$400mm adjusted annual FCF provides additional funds to for
shareholder friendly practices
1. CapitalIQ Public Ownership Detail - Form13F 2. Definitive
proxy statement DEF 14A 3. WR Grace: The End of an Empire- The Wall
Street Journal
Fred Festa, CEO and Chairman of W.R. Grace, has a $14.9mm
position in Grace common stock
Festas background at GE and Morgenthaler Private Equity Partners
shapes his ideology of shareholder value enhancement
According to the DEF14A, key executives must maintain 3-5x base
salary in the form of stock
W.R. Grace only operates in core competency businesses where
they have a #1 or #2 position.
Grace has demonstrated accretive bolt-on acquisitions through 22
successful investments from 2003 through 2014
Disciplined Investment Criteria: Strategic fit (technology,
market access), hard cost and capital synergies, and risk-adjusted
return.
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12
V. Value Drivers: Net Operating Loss Carryforwards - Tax
Asset
3. W.R. Graces overlooked NOLs provide additional upside to SOTP
valuation.
W.R. Grace has accumulated a $1.8 billion NOLs ($670mm -
Carryforward from emergence of bankruptcy, $632mm - PI DPO
settlement, $490mm - Warrant settlement)
Lack of significant change in ownership during the bankruptcy
process allowed W.R. Grace to maintain a substantial amount of its
NOLs (governed by IRC Section 382 Limitation)
The cash tax rate is anticipated to remain in the range of
10-15% through 2018 NOLs have a NPV of $0.4 billion adding an
additional 5.7% upside to SOTP valuation
N O L D C F 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0
E 2 0 2 1ERevenue 3375.1 3511.3 3651.0 3793.4 3937.7 4083.3
4229.3EBIT 667.0 710.0 754.9 801.5 838.2 874.9 911.3
US EBIT 200.1 213.0 226.5 240.5 251.4 262.5 273.4Interest
Payments -59.3 -59.3 -59.3 -59.3 -59.3 -59.3 -59.3US EBI (Pre-Tax
Income) 140.8 153.7 167.2 181.1 192.1 203.1 214.1
Beginning US NOL Balance 1800.0 1659.2 1505.5 1338.3 1157.2
965.0 761.9NOL Carryforw ard Usage -140.8 -153.7 -167.2 -181.1
-192.1 -203.1 -214.1Ending US NOL Balance 1659.2 1505.5 1338.3
1157.2 965.0 761.9 547.8
Statutory Tax Rate 35% 35% 35% 35% 35% 35% 35%
Beginning DTA Balance 630.0 580.7 526.9 468.4 405.0 337.8
266.7DTA Change -49.3 -53.8 -58.5 -63.4 -67.2 -71.1 -74.9Ending DTA
580.7 526.9 468.4 405.0 337.8 266.7 191.7
Discount Factor 0.922 0.850 0.784 0.723 0.666 0.614
0.566Discounted Value 45.4 45.7 45.9 45.8 44.8 43.7 42.4
Discount Rate 8.46% WACCNPV of NOLs ($mn) 408.1
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Spin-off of GCP provides restructuring opportunities to reduce
operating costs Improved management focus and lower corporate costs
drive operating margin expansion Based on 2015 Q1 results, adjusted
EBIT Margin has already increased 130 bps yoy
Further Margin Expansion Opportunities: 1. Continued investment
in targeted R&D creates better product mix with improved
pricing power
due to innovative product launches in an up-cycle (+100 bps)
Pricing power will be further driven by secular demand growth,
especially for FCC Catalysts
2. Aggressive supply chain repositioning based on flexible
global operations enables margin expansion at the operating income
level (+100 bps)
Grace has benefited from increase in demand in key global
markets
3. Cycle-bottom prices for major inputs such as rare earth
metals, especially Lanthanum Oxide, reduce production costs (+100
bps)
At $1.03/kg (2014), Lanthanum Oxide is at the lowest price point
since 2008
V. Value Drivers: Margin Expansion Opportunities
4. W.R. Grace has a visible pathway and credible track-record
for margin expansion.
"Improving petchem ROA should come from underlying operational
improvement and better capital allocation."
Dan Loeb, Third Point, 2014 Q1 Investor Letter
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14
Post-Reorganization Equity Extended 13 year Chapter 11 process
due
to asbestos litigation has resulted in limited coverage for
Company besides investment positions by distressed funds
Excess Asset Value Sell side overlooks excess assets
including
excess cash ($500.0mm) and excess investment in unconsolidated
affiliate ($173.8mm)
Provides additional 8.4% upside
Margin improvement is underestimated Managements ability to
improve the margin
post-restructuring is not modeled into sell-side valuation
Margin expansion by 300 basis points provides 16.7% incremental
returns
VI. Mispricing and Catalysts
Mispricing Catalysts
Spin-off of Grace Construction Products Separation of GCP will
provide natural
shareholder turnover, lead to normalized multiples expansion,
and address double cyclicality valuation challenges
Shareholder Friendly Measures Share repurchases driven by
incentivized
management and distressed activist funds Monetization of JV with
Chevron provides
reclassification of excess asset into core operations
Increased Investor Transparency Increased coverage of orphan
stock after
extended Chapter 11 process will increase investor demand
Simplified capital structure due to PI DPO reduces situational
complexity
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15
VII. Valuation
W.R. Grace has multiple pathways to unlock value for an
asymmetric risk-reward.
I. Sum of the Parts II. Net Operating Loss Carryforwards
III. Share Repurchase
IV. Margin Expansion
Incremental Return
16.1%
+ 5.7%
+ 1.6%
+ 16.7%
40.1%
Cumulative CAGR
5.1%
6.8%
7.3%
11.9%
11.9%
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1. Spin-off of construction materials business may not receive
approval. Panelist of distressed and activist funds will help push
through a vote Management under Fred Festa will focus on value
accretive shareholder measures
2. Cyclicality of construction end markets could result in
depressed sales. Spin-off will help separate out cyclical
construction from non-cyclical specialty catalysts/materials
Improving non-housing construction provides favorable backdrop for
construction business
3. W.R. Graces Defined Benefit Plan is underfunded by $473.1
million. Margin of safety even with additional funding contribution
provides asymmetric risk-reward Shift to Defined Contribution Plan
will provide more feasible course of action
4. Asbestos lawsuit result in excess payments to Property Damage
claimholders. Management incentive is to provide accurate, if not
aggressive, estimates of asbestos liability to avoid
loss recognition in later years Hard cap of $80mm on amount of
additional liability that can be payable to claimholders
VIII. Key Risks
Key Risks & Mitigants
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Current Employees Anonymous Senior Principal Engineer Rosanne
Schiller Director of Marketing David Joseph Investor Relations
Tania Almond Investor Relations Competitors Matthew Juneau
Albemarle Investor Relations Consultants Anonymous The Catalyst
Group Sell-Side Anonymous Goldman Sachs Anonymous Credit Suisse
Primary Research
IX. Thank You!
Special Thanks To: Justin Ang Sahil Khetpal Dominic Waltz
Important Disclosures: Certain accounts managed by us are
currently long W.R. Grace. We may buy and/or sell shares of W.R.
Grace in the future for the accounts managed by us without notice,
and we are under no obligation or agreement to take, or not take,
any action or restrict our actions in any manner. This is not a
recommendation to buy or sell shares. Our views are subject to
change without notice and we may trade in any manner, whether
consistent or inconsistent with this recommendation. The
information provided is from public sources. We have not
independently verified this information and we make no
representations as to the accuracy or correctness of any such
information. We undertake no obligation to update any information
below.
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W.R. Grace filed for voluntary Chapter 11 on April 2, 2001 as a
result of asbestos litigation
On February 3, 2014, W.R. Grace emerged from bankruptcy
Effects: 1. Two asbestos trusts under Section 524(g) of
Bankruptcy Code
1. PI (Personal Injury) Trust-no further obligations 2. PD
(Property Damage) Trust broken into non-ZAI and ZAI (attic
insulation product) claims
2. Company has accrued unresolved non-ZAI PD claims that are
probable and estimable 1. Non-fixed claims 2. Obligated payments to
PD trust every 6 months based on non-ZAI PD Claims allowed by
bankruptcy
court during preceding 6 months + interest + PD Trust
expenses
3. ZAI PD Claims obligated for fixed payment of $30mm February
3, 2017 and 10 contingent payments of $8mm per year to ZAI PD
Account during 20 year period beginning on February 3, 2019, with
payments due only if assets of ZAI PD account fall below $10mm
during preceding year
1. Liability recorded for fixed deferred payment 2. Not recorded
for contingent payments 3. Secured by 77.4mm shares of new issuance
common stock
X. Appendix: Bankruptcy Overview
Chapter 11 Reorganization
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Extended Chapter 11 process has resulted in extended financial
and reputational damage to Company
Alternative fuel sources provide tail risk for
WR Graces operations
Bearish outlook on energy-related industries
Market is focused on short term EPS vs. earnings quality
Sell-side operates in sector specific pigeonholes of chemicals
vs construction
X. Appendix: Summary of Variant View
Market Perspective Our Perspective
Reorganized Company has minimal exposure to asbestos litigation
and long term contract redemption rates are steady
Secular tailwinds from renewed focus on heavy oil refinement
will drive volume sales due to inelastic demand
W. R. Grace benefits from lower crude prices due to increased
catalyst demand by refineries
Due to FIFO Inventory accounting, there is a lag until low input
costs are realized in COGS, which increase gross margin
SOTP valuation provides valuation clarity
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20
Commercial construction recovery in US and emerging markets
infrastructure build-out creating demand for specialty building
materials
Increasing quality and sustainability of construction projects
relies on advanced products
Waterproofing Systems Roofing products
1. BCC Research
X. Appendix: Specialty Building Materials & Packaging
Industry
Demand Driven Building Products High Value Packaging
Products
Conformation to Food & Beverage industry regulations
Focus on design for convenience and sustainability
Solutions address shift away from BPA epoxy resins towards green
products
Products are integrated into customer plants and supply
chains
0
500
1,000
1,500
2,000
2,500
3,000
2012 2013 2014 2019
$mill
ions
Consumer Packaging Sealants Market Size
CAGR: 4.1%
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Primary products are Cement Additives and Concrete
Admixtures
Fragmented industry with few dominant players Grace has
manufacturing facilities across
the world, creating high quality global brand
X. Appendix: Specialty Construction Products Industry
Highly Localized Ongoing Secular Global Growth
Specialty cement products are critical for cement manufacturers
to enhance quality
Expansion in cement capacity from NA construction revival,
emerging market growth
Matching Supply/Demand characteristics imply stable, growing
prices
Graces advanced products cater to efficiency, environmental
concerns
18% 6%
5% 71%
Cement Additives Marketshares
Grace Sika BASF Othes
15%
8%
7% 70%
Concrete Admixtures Market Share
BASF Grace Sika Others 0.00
20.00
40.00
60.00
80.00
100.00
120.00
0
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2020
2030
Pri
ce
Cem
ent P
ouct
ion
(met
ic to
ns)
Global Cement Trends
Production Unit value ($/t)
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22
X. Appendix: Valuation
Sum of the Parts Base Case
Segment 2015E EBITDA Low High Low High
New Grace 652.3$ 10.0x 12.0x 6,523.1$ 7,827.7$ New GCP 177.3$
8.0x 10.0x 1,418.1$ 1,772.7$
Core Enterprise Value 9.6x 11.6x 7,941.2 9,600.4 Plus: Excess
Cash 500.0 500.0 Plus: Excess Investments 173.8 173.8 Plus: Value
from NOLs 408.2 408.2 Adjusted Enterprise Value 9,023.3$
10,682.4$
Less: Debt 2,015.8 2,015.8 Total Equity Value 7,007.5$
8,666.6$
Fully Diluted Shares Outstanding (MM) 72.6 72.6Less: Share
Repurchase Program 0.0 0.0
Total Shares Outstanding 72.6 72.6
SOTP Equity Value 96.52$ 119.38$ Cumulative Upside -1.53%
21.79%Value CAGR over 3 Years -0.51% 6.79%
Multiple EV
Base Case + Share Repurchases
Segment 2015E EBITDA Low High Low High
New Grace 652.3$ 10.0x 12.0x 6,523.1$ 7,827.7$ New GCP 177.3$
8.0x 10.0x 1,418.1$ 1,772.7$
Core Enterprise Value 9.6x 11.6x 7,941.2 9,600.4 Plus: Excess
Cash - - Plus: Excess Investments 173.8 173.8 Plus: Value from NOLs
408.2 408.2 Adjusted Enterprise Value 8,523.3$ 10,182.4$
Less: Debt 2,015.8 2,015.8 Total Equity Value 6,507.5$
8,166.6$
Fully Diluted Shares Outstanding (MM) 72.6 72.6Less: Share
Repurchase Program 5.1 5.1
Total Shares Outstanding 67.5 67.5
SOTP Equity Value 96.41$ 120.99$ Cumulative Upside -1.64%
23.43%Value CAGR over 3 Years -0.55% 7.27%
Multiple EV
Base Case + Share Repurchases + Margin Expansion
Segment 2015E EBITDA Low High Low High
New Grace 716.4$ 10.0x 12.0x 7,164.3$ 8,597.2$ New GCP 210.4$
8.0x 10.0x 1,683.5$ 2,104.3$
Core Enterprise Value 9.5x 11.5x 8,847.8 10,701.5 Plus: Excess
Cash - - Plus: Excess Investments 173.8 173.8 Plus: Value from NOLs
408.2 408.2 Adjusted Enterprise Value 9,429.8$ 11,283.6$
Less: Debt 2,015.8 2,015.8 Total Equity Value 7,414.0$
9,267.8$
Fully Diluted Shares Outstanding (MM) 72.6 72.6Less: Share
Repurchase Program 5.1 5.1
Total Shares Outstanding 67.5 67.5
SOTP Equity Value 109.84$ 137.30$ Cumulative Upside 12.06%
40.08%Value CAGR over 3 Years 3.87% 11.89%
Multiple EV
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23
X. Appendix: Valuation
Multiples Valuation Comps
Company Enterprise Revenue (USD) EBITDA (USD) EV/EBITDAName
Value 2013A 2014A 2015E 2013A 2014A 2015E 2013A 2014A 2015E
New Grace Comps 0
Albemarle Corporation (NYSE:ALB) 6,505.5 2,519.2 2,394.3 2,445.5
705.4 428.7 899.7 9.22x 15.17x 7.23xJohnson Matthey plc (LSE:JMAT)
11,512.2 16,071.3 16,710.0 15,661.9 781.0 860.7 863.0 14.74x 13.38x
13.34xClariant AG (SWX:CLN) 8,112.6 6,390.2 6,432.3 6,261.8 820.3
833.0 894.4 9.89x 9.74x 9.07x
New GCP Comps
Forbo Holding AG (SWX:FORN) 2,021.6 1,199.7 1,226.8 1,192.6
172.1 183.9 186.5 11.75x 10.99x 10.84xSika AG (SWX:SIK) 9,419.4
5,408.1 5,859.4 5,833.3 697.8 823.3 901.3 13.50x 11.44x 10.45x
-
24 1. Tax Savings = Change in NOL Balance * Regular Federal Tax
Rate
X. Appendix: Valuation
Operating Model Base Case 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0
14A 2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0 E 2 0 2
1E
RevenueRefining Catalysts 742.0 1077.5 986.8 832.4 845.5 873.6
903.5 935.6 969.8 1006.4 1045.5 1087.3
Growth Rate % 45.2% -8.4% -15.6% 1.6% 3.3% 3.4% 3.5% 3.7% 3.8%
3.9% 4.0%Polyolefin and Chemical Catalysts 240.3 269.8 281.3 291.6
401.3 445.4 489.2 531.6 571.5 607.7 639.1 664.7
Growth Rate % 12.3% 4.3% 3.7% 37.6% 11.0% 9.8% 8.7% 7.5% 6.3%
5.2% 4.0%Catalysts Technologies 982.3 1347.3 1268.1 1124.0 1246.8
1319.0 1392.8 1467.2 1541.3 1614.1 1684.6 1752.0
Growth Rate % 37.2% 1.0% -11.4% 10.9% 6.1% 5.6% 5.3% 5.1% 4.7%
4.4% 4.0%Materials Technologies 819.4 872.6 862.6 878.5 890.6 914.9
939.8 965.4 991.7 1018.7 1046.5 1075.0
Growth Rate % 6.5% 1.0% 1.8% 1.4% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7%
2.7%Revenue 1801.7 2219.9 2130.7 2002.5 2137.4 2233.9 2332.6 2432.6
2533.0 2632.9 2731.1 2827.0
Construction Revenue 873.3 992.0 1024.8 1058.2 1105.6 1138.8
1172.9 1208.1 1244.4 1281.7 1320.1 1359.7Growth Rate % 13.6% 3.3%
3.3% 4.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Total Revenue 2675.0 3211.9 3155.5 3060.7 3243.0 3372.6 3505.5
3640.7 3777.4 3914.5 4051.3 4186.8
EBITDACatalysts Technologies 288.3 441.3 447.8 381.7 444.6 483.5
524.5 567.2 595.9 624.0 651.3 677.3
Margin % 29.3% 32.8% 35.3% 34.0% 35.7% 36.7% 37.7% 38.7% 38.7%
38.7% 38.7% 38.7%Materials Technologies 191.8 189.6 191.5 213.2
217.3 224.7 232.3 240.1 248.2 256.6 265.2 274.1
Margin % 23.4% 21.7% 22.2% 24.3% 24.4% 24.6% 24.7% 24.9% 25.0%
25.2% 25.3% 25.5%Corporate -108.1 -89.1 -81.2 -68.4 -60.6 -63.4
-66.2 -69.0 -71.9 -74.7 -77.5 -80.2
Margin % -6.0% -4.0% -3.8% -3.4% -2.8% -2.8% -2.8% -2.8% -2.8%
-2.8% -2.8% -2.8%New Grace EBITDA 372.0 541.8 558.1 526.5 601.3
644.8 690.6 738.3 772.2 805.9 839.0 871.2Construction EBITDA 18%
199.3 205.3 211.4 217.8 224.3 231.0 238.0Total EBITDA 844.1 895.9
949.7 990.0 1030.2 1070.0 1109.2
Margin % 25.0% 25.6% 26.1% 26.2% 26.3% 26.4% 26.5%Consensus
Margin % 23.7% 24.6% 25.3%
Difference 1.3% 1.0% 0.8%
EBITCatalysts Technologies 239.6 388.8 393.8 327.5 378.3 409.4
442.1 476.0 510.8 534.9 558.3 580.6
Margin % 24.4% 28.9% 31.1% 29.1% 30.3% 31.0% 31.7% 32.4% 33.1%
33.1% 33.1% 33.1%Materials Technologies 160.0 158.7 162.0 181.8
185.2 191.8 198.7 205.7 213.1 220.6 228.4 236.5
Margin % 19.5% 18.2% 18.8% 20.7% 20.8% 21.0% 21.1% 21.3% 21.5%
21.7% 21.8% 22.0%Corporate (New Grace) -109.9 -90.9 -82.9 -72.1
-65.2 -68.2 -71.2 -74.3 -77.3 -80.4 -83.4 -86.3
Margin % -6.1% -4.1% -3.9% -3.6% -3.1% -3.1% -3.1% -3.1% -3.1%
-3.1% -3.1% -3.1%Construction Products 89.9 97.3 125.2 151.7 161.7
168.2 174.9 181.7 188.6 195.5 202.5 209.3
Margin % 3.0% 4.0% 5.0% 5.0% 5% 5% 5% 5% 5% 5% 5%Corporate
(Full) -163.1 -131.5 -122.8 -110.2 -99.0 -103.0 -107.0 -111.1
-115.3 -119.5 -123.7 -127.8
Margin -3.1% -3.1% -3.1% -3.1% -3.1% -3.1% -3.1%Total EBIT 626.2
666.5 708.6 752.3 797.2 831.6 865.5 898.7US EBIT 30.0% 199.9 212.6
225.7 239.2 249.5 259.7 269.6EBIT on New Grace 289.7 456.6 472.9
437.2 498.3 533.1 569.6 607.5 646.6 675.2 703.4 730.8
-
25 1. Tax Savings = Change in NOL Balance * Regular Federal Tax
Rate
X. Appendix: Valuation
Operating Model NOLs
N O L D C F 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0 14A 2 0 15 E 2 0
16 E 2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0 E 2 0 2 1ERevenue 2675.0
3211.9 3155.5 3060.7 3243.0 3375.1 3511.3 3651.0 3793.4 3937.7
4083.3 4229.3EBIT 667.0 710.0 754.9 801.5 838.2 874.9 911.3
US EBIT 200.1 213.0 226.5 240.5 251.4 262.5 273.4Interest
Payments -59.3 -59.3 -59.3 -59.3 -59.3 -59.3 -59.3US EBI (Pre-Tax
Income) 140.8 153.7 167.2 181.1 192.1 203.1 214.1
Beginning US NOL Balance 1800.0 1659.2 1505.5 1338.3 1157.2
965.0 761.9NOL Carryforw ard Usage -140.8 -153.7 -167.2 -181.1
-192.1 -203.1 -214.1Ending US NOL Balance 1659.2 1505.5 1338.3
1157.2 965.0 761.9 547.8
Statutory Tax Rate 35% 35% 35% 35% 35% 35% 35%
Beginning DTA Balance 630.0 580.7 526.9 468.4 405.0 337.8
266.7DTA Change -49.3 -53.8 -58.5 -63.4 -67.2 -71.1 -74.9Ending DTA
580.7 526.9 468.4 405.0 337.8 266.7 191.7
Discount Factor 0.922 0.850 0.784 0.723 0.666 0.614 0.566
Remaining ValueDiscounted Value 45.4 45.7 45.9 45.8 44.8 43.7 42.4
94.4
Discount Rate 8.46% WACCNPV of NOLs ($mn) 408.1
Note: Assumption Justifications Discount Rate We use WACC as w e
believe it reflects the riskiness of generating shieldable
income
US EBIT We assume that US operations represent 30% of Total EBIT
going forw ard, in line w ith recent historicals
Interest Payments We assume Debt Load as specified by Management
Guidance and assume no debt paydow n over forecast period
-
26 1. Tax Savings = Change in NOL Balance * Regular Federal Tax
Rate
X. Appendix: Valuation
DCF Base Case
Key DCF MetricsEquity Beta 1.066
Beta After Mean Reversion 1.044
Yield on 10% Treasury Note 0.023
Equity Cost of Capital 9.6%
Debt Cost of Capital 4.05% L+350
Market Cap 7218.8Total Enterprise Value 8683.2Net Debt
1464.4
WACC 8.46%
Note: Assumption Justifications Refining growth "Petroleum
refining market expected to grow at 2.7% according to HIS
Chemical". We estimate Grace's competetive advantages to enable
stronger market share capture
Polyolefin/Chemical Catalysts growth "Propylene Market grow ing
at ~11% CAGR and longer term at 5% according to Nexant Technologies
Prospectus"
Materials growth "Grace CEO on Q4 call: seeing strong signals in
Materials tech". Our conservative estimates used here at ~
developed economies GDP Grow th
Operating Margins Based on strong pricing environment and low
input costs w e are estimating persistance in margins going forw
ard for the value-added new Grace segments
Taxes Savings 49.2 53.6 58.2 62.9 66.6 70.1 73.6 0.0 0.0Marginal
Tax Rate 35% 35% 35% 35% 35% 35% 35% 35% 35%
D C F 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0 14A 2 0 15 E 2 0 16 E
2 0 17 E 2 0 18 E 2 0 19 E 2 0 2 0 E 2 0 2 1E C VEBIT on New Grace
289.7 456.6 472.9 437.2 498.3 533.1 569.6 607.5 646.6 675.2 703.4
730.8
Tax Rate 35% 35% 35% 35% 35% 35% 35%EBI After Tax 346.5 370.2
394.9 420.3 438.9 457.2 475.1
Catalysts Technologies 48.7 52.5 54 54.2 66.3Materials
Technologies 31.8 30.9 29.5 31.4 32.1Corporate 2.6 2.6 2.6 5.7
7
(+) D&A 83.1 86 86.1 91.3 105.4 111.8 121.0 130.8 125.7
130.7 135.6 140.4NWC 289.3 387.8 353.6 240.7 379.2 394.4 409.9
425.7 441.7 457.7 473.7 489.6
% of Revenues 11% 12% 11% 8% 12% 12% 12% 12% 12% 12% 12% 12%(-)
NWC (49.70) (98.50) 34.20 112.90 (138.50) (15.16) (15.54) (15.81)
(15.98) (16.04) (15.99) (15.84) (-) Capex -83.8 -90.8 -98.1 -94.2
-98.0 -101.7 -105.3Cash Flow Before Tax Refund 359.3 384.9 411.8
435.7 455.5 475.1 494.3 '21Tax Refund 49.2 53.6 58.2 62.9 66.6 70.1
73.6 Terminal Value GrowthFree Cash Flow 408.5 438.6 470.0 498.6
522.1 545.2 567.9 11843.1 3.50%Discount Factor 0.922 0.850 0.784
0.723 0.666 0.614 0.566 0.566Discounted Value 376.6 372.8 368.3
360.3 347.8 334.9 321.6 6706.4New Grace EV 9188.7New GCP EV 1893.9
*Based on multiplesExcess Investments 673.8 *Unconsolidated
affiliate and excess cash Debt 2015.8Total Equity Value
9740.7Shares Outstanding 67.5Value Per Share 144.31$
-
27
X. Appendix: Valuation
DCF Downside Case D C F 2 0 10A 2 0 11A 2 0 12A 2 0 13A 2 0 14A
2 0 15 E 2 0 16 E 2 0 17 E 2 0 18 E C V
Total Revenue 2675.0 3211.9 3155.5 3060.7 3243.0 2762.0 2615.3
2759.2 3200.6growth % 20.1% -1.8% -3.0% 6.0% -14.8% -5.3% 5.5%
16.0%
EBITDA 372.0 541.8 558.1 526.5 601.3 275.3 375.5 401.9
511.2margin % 13.9% 16.9% 17.7% 17.2% 18.5% 10.0% 14.4% 14.6%
16.0%
EBIT on New Grace 289.7 456.6 472.9 437.2 498.3 185.6 285.8
312.2 421.4margin % 10.8% 14.2% 15.0% 14.3% 15.4% 6.7% 10.9% 11.3%
13.2%
EBIT on New Grace 289.7 456.6 472.9 437.2 498.3 185.6 285.8
312.2 421.4Tax Rate 15.0% 15.0% 15.0% 15.0% *NOL Projection
EBI After Tax 157.7 242.9 265.3 358.2(+) D&A 83.1 86 86.1
91.3 105.4 89.8 89.8 89.8 89.8
% of Rev 3.1% 2.7% 2.7% 3.0% 3.3% 3.3% 3.4% 3.3% 2.8%(-) NWC
-49.7 -98.5 34.2 112.9 -138.5 56.25 17.15 (16.82) (13.10) '18(-)
Capex -89.8 -89.8 -89.8 -89.8 Terminal Value GrowthFree Cash Flow
214.0 260.1 248.5 345.1 7197.2 3.50%Discount Factor 0.922 0.850
0.784 0.723 0.723Discounted Value 197.3 221.1 194.8 249.4 5200.4New
Grace EV 6062.9New GCP EV 1820.3 *Based on multiplesExcess
Investments 673.8Debt 2015.8Total Equity Value 4720.9Shares
Outstanding 67.4Value Per Share 70.07$
Key DCF MetricsEquity Beta 1.066
Beta After Mean Reversion 1.044
Yield on 10% Treasury Note 0.023
Equity Cost of Capital 9.6%
Debt Cost of Capital 4.05% L+350
Market Cap 7218.8Total Enterprise Value 8683.2Net Debt
1464.4
WACC 8.46%
Note: Assumption Justifications Revenue Growth Recession metrics
from 2009 and 2010 Applied to FY15 and FY16
EBIT Margins Recession + Post Recession margins applied to
projection period
Tax Rate Estimates tax rate using NOL Carryforw ards to shield
income. Based on Management guidance
Perpetuity Grow th Reasonable perpetuity grow th of global
GDP
-
28
X. Appendix: Valuation
DCF Sensitivities
Base Case SensitivityTerminal Grow th Rate
WACC 2.5% 3.0% 3.5% 4.0% 4.5%9.5% $108.9 $114.3 $120.5 $127.9
$136.89.0% $116.8 $123.3 $130.9 $140.0 $151.18.5% $126.1 $133.9
$143.3 $154.8 $169.18.0% $137.1 $146.7 $158.5 $173.2 $192.17.5%
$150.2 $162.3 $177.5 $196.9 $222.9
Terminal Grow th RateWACC 2.5% 3.0% 3.5% 4.0% 4.5%
9.5% 11.1% 16.6% 22.9% 30.5% 39.5%9.0% 19.2% 25.8% 33.5% 42.8%
54.2%8.5% 28.6% 36.6% 46.2% 57.9% 72.5%8.0% 39.8% 49.7% 61.7% 76.7%
96.0%7.5% 53.3% 65.6% 81.1% 100.9% 127.4%
Bear Case SensitivityTerminal Grow th Rate
WACC 2.5% 3.0% 3.5% 4.0% 4.5%9.5% $45.3 $49.3 $53.9 $59.5
$66.19.0% $50.5 $55.3 $60.9 $67.6 $75.98.5% $56.6 $62.4 $69.3 $77.7
$88.28.0% $63.9 $70.9 $79.5 $90.2 $104.07.5% $72.6 $81.3 $92.3
$106.3 $125.1
Terminal Grow th RateWACC 2.5% 3.0% 3.5% 4.0% 4.5%
9.5% (52.7%) (48.5%) (43.7%) (37.9%) (31.0%)9.0% (47.3%) (42.3%)
(36.4%) (29.4%) (20.7%)8.5% (40.9%) (34.9%) (27.7%) (18.9%)
(7.9%)8.0% (33.3%) (26.0%) (17.0%) (5.8%) 8.6%7.5% (24.2%) (15.1%)
(3.7%) 11.0% 30.6%