Chase Corporation: Real increase expected after latest deal (NYSE: CCF)


Thomas Barwick

Shares of Chase Corporation (NYSE: CCF) again saw a slight rebound after a difficult first half. With the company announcing a fairly large transaction (for the size of its own company), it’s time to update a date investment case here.

This investment record actually dates back to 2016, when I concluded that stocks were largely fairly priced.

The company – Back to 2016

Chase is a well run industrial conglomerate which is run by the Chase family. In 2016 Chase was a collection of protective applications, used in insulation, coatings, sensor strips, chemical intermediates and other items. At the time, the company generated some $240 million in revenue, three-quarters of which came from the industrial segment, with construction making up the rest of the revenue.

The company managed to increase sales by 150% in the decade to 2016, with operating margins stable at 20% at the time. This growth was driven by solid organic growth, sometimes complemented by targeted transactions. The company announced a few small transactions at the time, but net debt was very modest.

On the $250 million pace in sales, Henkel posted operating profits of $50 million, of which it earned about $30 million, or $3.25 per share. With shares trading at 21 times earnings at $68 per share, this multiple marked a premium to the market and a historic Chase multiple, no doubt the result of strong operating performance at the time, the stocks that rose 70% that year, clearly indicating valuation multiple inflation. .

This conclusion led me to conclude not to “chase” stocks, as the risk-reward ratio did not seem too compelling to get involved at the time.

Caution saves the day

Fast forward from 2016 to now in 2022, equities posted strong returns at the start of this period. Stocks crossed the $100 mark in 2017, but stocks have been in the $80 to $120 range in the five-year period since. After trading at the high end of the range in the summer of last year, the shares have fallen to $75 in recent weeks, now trading at $92 per share.

In November of last year, Chase job its 2021 results. Full-year revenue increased modestly from 2016, with revenue reported at $293 million, as the company maintained strong operating margins of around 20%, with profits operating expenses posted at $60 million. With net income showing at $45 million, earnings came in at $4.73 per share, essentially revealing that the jump from $68 in 2016 to the $100 mark happened in line with the growth in earnings per share during this period.

That was a bit too short-sighted, as the company managed to grow a modest net debt load in 2016 into a net cash position of $120 million, or about $13 per share. Taking this into account, valuations have become much less demanding.

During the first three quarters of this year, the company grown up sales by around 10%, mainly due to price increases, as profits remained stable. With 9.5 million shares outstanding now trading at $92, the market value compares to $874 million, or $750 million when considering net cash position.

make the money work

Immediately following the release of third quarter results, Chase announcement a huge deal. The company has reached an agreement to acquire Nucera Solutions in a $250 million deal, a deal that will essentially turn a current net cash position of over $120 million into an equivalent net debt.

Nucera produces specialty polymers and polymerization technologies, used in a wide range of services. The agreement involves a premier production facility in Oklahoma, employing 130 people at its headquarters and select international sales offices. The deal is expected to add $83 million in revenue, implying that a multiple of 3x sales has been paid. With adjusted EBITDA margins above 25%, we see at least $21 million in EBITDA, for a maximum of 12 times the EBITDA multiple paid. By comparison, Chase is trading at around 10x EBITDA as its own valuation is quite modest at 16-17x 2021 earnings, after removing net cash.

Pro forma EBITDA will likely be around $100 million, as Chase reports that it expects a leverage ratio of 1.2x, consistent with my own calculations. With an EBITDA that should increase by 25%. Assuming $21 million in EBITDA contributed, $1 million in amortization expense, some $3 million in incremental interest costs, and a 20% tax rate, I see potential for adding more. ‘about $1.50 in earnings, with pro forma earnings estimated at nearly $6 per share.

This means that, based on such earnings power, the multiple drops to 15 times, as a modest net debt has been incurred, but this is still very manageable. While the acquisition multiple was somewhat higher than its own valuation in the Nucera deal, and Chase may have been able to allocate more funds to buy back shares at lower levels, the overall impact is positive.

Chase is making a move up, and earnings could really be seen at $6 per share, or more, while leverage is very modest and the resulting earnings multiples aren’t exacting at 15x . This is a modest multiple given the strong long-term positioning, as years of stagnation mean there is room for expansion in valuation multiples going forward.


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