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NLC Stock Pitch - Full Version

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Full version of stock pitch presentation made to the weIMG club at Chicago Booth

Full version of stock pitch presentation made to the weIMG club at Chicago Booth

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  • 1. weIMG Stock Pitch Presentation November 14, 2009 richmond@chicagobooth.edu
  • 2. Long Idea: Nalco • Nalco is a service-based specialty chemical company that provides solutions to treat water and enhance air quality for industrial & institutional use Operates in 3 segments: Water & Process Services, Energy, and Paper • Capitalization: Ticker: “NLC” Enterprise value(1): $6.8 billion Current Price: $23(2) Equity market value: $3.2 billion 1 Yr. Target Price: $28 Adjusted net debt(1) / Enterprise value: ~53% 1 Yr. Expected Return: > 20% • Recent valuation multiples: Consensus implied forward P/E: 2010: 18.2x ; 2011: 13.6x (4yr average: ~19x) Average PEG ratio for the past 4 years: ~0.6 Adjusted EV/EBITDAR of ~ 9.5x in the past 4 years (1) Includes unfunded pension & OPEB obligations of $497 million and capitalized value of operating lease of $169 million. (2) Based on the five-day average closing price between 11/06/2009 and 11/12/2009. 2 richmond@chicagobooth.edu
  • 3. Nalco Stock vs. S&P 500 (2008 – YTD 2009) 52 wk High: $8 52 wk Low: $24 Beta: 1.38 3 richmond@chicagobooth.edu
  • 4. Long Thesis: Investment Highlights Sticky service-based business model misunderstood by the Street Not all products & services are exposed to economic volatility Strong earnings power underneath a large debt load FCF generation increased during the recession New CEO understands past missteps; focused on reinventing Nalco Solidifying position in “BRICs+”(1) markets after years of under-investment Borrowed DuPont playbook: Retraining Nalco’s sales force (mostly P. Eng & PhD) Innovative new products + Operational Stability = Multiple Expansion 3D TRASAR for boilers has outsize market potential Nalco is in the epicenter of favorable long-term secular themes in water treatment, energy production, and air pollution Essential to support infrastructure required to drive economic development (1) Refers to the “BRICs” (i.e. Brazil, India, Russia, China) and countries in Europe, Africa, and Middle East 4 richmond@chicagobooth.edu
  • 5. Leading Market Share in All its Segments Source: Nalco presentation 5 richmond@chicagobooth.edu
  • 6. Water Treatment Industry is Highly Fragmented Sizeable Opportunity for Nalco to make selective “tuck-in” acquisitions Source: Nalco Presentation “MVA” is Manufacturing Value Added Nalco has sizeable scale over its competitors – each of which is less than half its size 6 richmond@chicagobooth.edu
  • 7. What the Consensus is Missing • Upside surprise #1: Growth from “BRICs+” (~42% of ‘08 Revenues) Recurring business alone has historically grown 3-4% per year • Upside surprise #2: Robust 3D TRASAR sales (boiler & cooling tower) High margin offering that reduces customer maintenance CapEx & O&M costs Unit sales for boiler application in ’09 at same level as ’08, despite the recession “Foot in the door” for other sales opportunities (e.g., Mobotec) • Upside surprise #3: Continue to deliver cost savings Surpassed $100 million goal in 2009 in Q3; raised full year target to $150 million Employee bonus tied to level of cost savings achieved • Risk of inability to refinance debt has been laid to rest Next large repayment ($490 million) not due until Q3 2011 Nalco stock sold off during the credit crisis due to heightened refinancing risk In addition to the upside surprises, investors need to look past 2010 and realize that industrial and energy production will not remain idle, especially in BRICs+ markets 7 richmond@chicagobooth.edu
  • 8. Why the Sell-Side does NOT Understand Nalco Excerpt from Barclays’ November 3, 2009 research note (pg.3) Colder weather does not have an affect on the efficiency of a plant’s cooling system as water is discharged from boilers at very high temperatures. Therefore, the usage of chemicals to treat a plant’s cooling water is not affected by seasonality 8 richmond@chicagobooth.edu
  • 9. Strong and Consistent Earnings Power ~7% CAGR ~6% CAGR Source: Nalco presentation 2008: Up 3.7% excluding $23m contribution from Synfuels division in the prior year (business closed at end of 2007) 9 richmond@chicagobooth.edu
  • 10. Relative Valuation: Still Below Fair Value Stock Price Mkt Cap Unadj TEV Net Debt/ TEV/Revenues TEV/EBITDA P/E Company (in $US) ($mm) ($ mm) TTM EBITDA 2010e 2011e 2010e 2011e 2010e 2011e PEG Danaher $ 72.00 $ 23,129 $ 24,443 0.7 x 2.0 x 1.9 x 10.9 x 9.9 x 18.5 x 16.4 x 2.35 Ecolab $ 46.00 $ 10,930 $ 11,801 0.8 x 1.9 x 1.8 x 10.0 x 9.2 x 20.4 x 17.8 x 0.68 Pall Water $ 34.00 $ 3,975 $ 4,278 0.7 x 1.7 x 1.6 x 9.7 x 8.7 x 17.5 x 14.8 x 1.09 Kurita Water Ind. $ 32.00 $ 4,117 $ 3,880 -0.5 x 1.7 x 1.6 x 7.9 x 7.1 x 20.8 x 18.3 x 2.12 Tetra Tech Inc. $ 26.00 $ 1,575 $ 1,581 0.0 x 1.0 x 0.9 x 9.6 x 9.6 x 19.1 x 16.8 x nm Calgon Carbon $ 14.00 $ 784 $ 768 -0.3 x 1.6 x 1.5 x 8.6 x 7.4 x 17.7 x 14.8 x 0.82 Mean 0.2 x 1.7 x 1.6 x 9.4 x 8.6 x 19.0 x 16.5 x 1.41 High 0.8 x 2.0 x 1.9 x 10.9 x 9.9 x 20.8 x 18.3 x 2.35 Low -0.5 x 1.0 x 0.9 x 7.9 x 7.1 x 17.5 x 14.8 x 0.68 Nalco Holding $ 23.00 $ 3,178 $ 6,113 5.3 x 1.5 x 1.4 x 8.5 x 7.7 x 17.0 x 13.3 x 0.29 Variance to Comps 2060% -9% -8% -10% -11% -11% -19% -79% EV to 2010 EBITDA EV to 2010 Revenues 2010e Revenues $ 23 8.5 x 9.0 x 9.5 x 10.0 x 10.5 x $ 23 1.5 x 1.6 x 1.7 x 1.8 x 1.9 x 2010e EBITDA -10.0% $ 645 $ 19 $ 21 $ 23 $ 25 $ 28 -10.0% $ 3,610 $ 19 $ 20 $ 23 $ 26 $ 28 Premium / (Discount) Premium / (Discount) -5.0% $ 681 $ 21 $ 23 $ 25 $ 28 $ 30 -5.0% $ 3,810 $ 21 $ 23 $ 26 $ 28 $ 31 0.0% $ 717 $ 23 $ 25 $ 28 $ 31 $ 33 0.0% $ 4,011 $ 23 $ 25 $ 28 $ 31 $ 34 5.0% $ 753 $ 25 $ 28 $ 30 $ 33 $ 36 5.0% $ 4,211 $ 25 $ 27 $ 30 $ 33 $ 37 10.0% $ 789 $ 27 $ 30 $ 33 $ 36 $ 39 10.0% $ 4,412 $ 27 $ 30 $ 33 $ 36 $ 39 Because of the significant amount of debt held by Nalco compared to its peers, comparative valuation using TEV/EBITDA multiple is the most appropriate. 10 richmond@chicagobooth.edu
  • 11. DCF Valuation: Looking Beyond 2010 Terminal 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e Value EBITDA $ 717 $ 799 $ 852 $ 903 $ 953 $ 996 $ 1,041 $ 1,067 YoY % Growth 26.2% 11.4% 6.7% 6.0% 5.5% 4.5% 4.5% 2.5% CapEx (112) (118) (125) (128) (131) (134) (138) (141) Change in Net Working Capital (14) (28) (29) (32) (36) (39) (42) (45) Cash Taxes (105) (133) (160) (169) (179) (187) (195) (200) Unlevered FCFF $ 486 $ 519 $ 539 $ 574 $ 607 $ 636 $ 665 $ 681 Terminal Value Multiple 8.0 x <<< reflects lower growth business Terminal Value $ 8,532 WACC 9.0% <<< 100bps premium over Bloomberg calculated rate PV (at 12/31/09) $ 465 $ 456 $ 434 $ 424 $ 412 $ 396 $ 380 $ 357 $ 4,282 Implied Share Price Calculation FCF to Firm $ 3,324 Terminal Value 4,282 Enterprise Value $ 7,606 Net Debt (2,934) Equity Value $ 4,672 Shares Outstanding 138.7 Implied Share Price $ 34 Implied EV/2010 EBITDA 10.6 x On a DCF basis, Nalco’s shares appear to be ~30% undervalued as the outsize growth in the next 5 years is not reflected in 2010 forward TEV/EBITDA multiple 11 richmond@chicagobooth.edu
  • 12. Owners of Nalco’s Stock Ownership Summary Type # Shares Held % of Total Shares Outstanding Market Value (USD in mm) 5 Institutions 116,208,816 84.09 2,657.7 Hedge Fund Managers 4,784,170 3.46 109.4 Insiders 6,491,213 4.70 148.5 3 Public and Other 10,710,389 7.75 245.0 Total 138,194,588 100.00 3,160.5 Top 5 shareholders control ~20% of Nalco’s stock Top Holders Holder # Shares Held % of Total Shares Outstanding Market Value (USD in mm) Position Date Berkshire Hathaway Inc. 9,000,000 6.51 205.8 Jun-30-2009 Shapiro Capital Management LLC 6,034,410 4.37 138.0 Jun-30-2009 Morgan Stanley Investment Management 5,050,165 3.65 115.5 Jun-30-2009 MSD Capital, L.P. 4,841,204 3.50 110.7 Jun-30-2009 The Vanguard Group, Inc. 4,807,602 3.48 109.9 Jun-30-2009 Source: Capital IQ 12 richmond@chicagobooth.edu
  • 13. Key Risks to the Investment Thesis • Further and prolonged deterioration in the economy Nalco’s “stickiness” is limited to a plant (or rig) being operational Diversified client base (largest customer accounts for < 3% of revenues) • Sudden increase in raw materials cost Equates to ~30% of expenses, with no single component >3.5% of the total • Inability to pay or refinance ~$500 million of debt maturing in 2011 Nalco’s ability to tap the credit markets was evident during Q2 2009, when it successfully refinanced $1.2 billion of debt • Adverse changes to the US pension legislation could require Nalco to make additional contributions (estimated at ~$200 million) Pension plan is currently ~ 80% funded Employees is legacy pension moved to defined contribution plan The biggest risk is that the global economy will enter into a prolonged period of negative growth – which will curtail output in sectors that will drive Nalco’s expansion 13 richmond@chicagobooth.edu
  • 14. Appendix 14 richmond@chicagobooth.edu
  • 15. Water, Water Everywhere… NOT Global Water Supply Volume % of % of Water Source (M km3) Total Freshwater Oceans 1,337.928 96.528% 0.000% Icecaps & Glaciers 24.062 1.736% 68.700% Ground water 23.399 1.688% 0.000% Though the earth is comprised of 70% Fresh 10.528 0.760% 30.100% Saline 12.871 0.929% 0.000% water, ~2% is available for residential, Ground Ice & Permafrost 0.300 0.022% 0.860% Lakes 0.176 0.013% 0.000% industrial, and agricultural use. Of the Fresh 0.091 0.007% 0.260% Saline 0.085 0.006% 0.000% ~2%, less than 33% is accessible Soil Moisture 0.165 0.012% 0.050% Atmosphere 0.013 0.001% 0.040% Rivers 0.002 0.000% 0.006% Biological Water 0.001 0.000% 0.003% TOTAL 1,386.047 100% 100% Key drivers of increasing water demand: Source: USGS Global Trends in Water Usage: Withdrawals 1) Population growth 2) Economic development 3) Rising affluence Investments in BRICs+ during the recession will position Nalco to assist industrial clients manage an increasingly constrained resource Source: Jefferies Intl, Unesco, Aquastat, IFPRI 15 richmond@chicagobooth.edu
  • 16. Nalco’s Rationale for Investing in BRICs Source: Nalco Presentation “MVA” is Manufacturing Value Added In developing countries, water treatment costs grow faster than GDP, adding to the already high industrial growth rates – both of which serve as opportunities for Nalco 16 richmond@chicagobooth.edu
  • 17. Coal, Oil, Gas & Nuclear to meet Energy Needs Incremental Primary Energy Demand by Fuel Type (2006 to 2030) * Includes biomass and waste, and other renewables Source: IEA World Energy Outlook 2008 “Mtoe” refers to “Mega tonne of oil equivalent”; 1 Mtoe translates to ~12,000 GWh, which represents ~1% of the total power generating capacity in the US today 17 richmond@chicagobooth.edu
  • 18. Cheap Sources of Power Require a lot of Water Source: California Energy Commission 18 richmond@chicagobooth.edu