September 19, 2023, ST. PETERSBURG, FL – Water Tower Research (www.watertowerresearch.com) has published an Initiation of Coverage Report on Rayonier Advanced Materials, Inc. (NASDAQ: RYAM) titled, “Mature Business Growing New Shoots”. The report can be accessed here.
RYAM is among the market leaders in the high-value portion of the wood-derived chemical industry. Starting with softwood and hardwood sourced from sustainable working forests as a primary raw material, RYAM converts the wood it purchases into high-value cellulosic specialty chemicals that are used as functional ingredients in downstream products for consumer and industrial end-markets. The overall annual market for wood pulp is estimated at 77 million metric tons (mt), but only 1.6 million tons are considered specialty, consisting primarily of ethers and acetates, as well as other dissolving cellulosic specialties, such as microcrystalline cellulose (MCC), nitrocellulose, etc. RYAM operates its businesses in three product-based segments: High Purity Cellulose (HPC), Paperboard (PB), and High-Yield Pulp (HYP).
Unlike most specialty chemical companies, RYAM’s primary raw material is not an oil or natural gas derivative, but is derived from a renewable resource, sustainably sourced, namely from trees. The company purchases tree logs or wood chips from lumber mills who source their trees from responsibly grown private and public forests. These materials are mechanically and chemically processed to liberate the natural water-soluble polymers contained in the pulp that can be subsequently processed into industrial specialty chemicals and materials and sold as functional ingredients into a wide array of industrial and consumer end-markets and applications, often helping to replace petrochemical-based alternatives in the process. In the course of production, RYAM currently uses approximately 40% of the dry wood solids it buys in the manufacturing of its products, burning the other 60% to co-generate energy at its plants. By developing the biomaterials part of its specialty cellulose business, it can more fully utilize that 60% in the production of these materials, rather than energy co-generation, increasing its sustainability characteristics along with shareholder value.
The current growth opportunity receiving the most management attention and capital investment is the biomaterials segment of the specialty cellulosic part of HPC. Accounting for approximately 5% of the SBU’s sales already, the growth of the existing biomaterials product portfolio, such as lignosulfonates and bio-based energy (bioethanol) and development of new products for new market applications, such as crude tall oil (where NGVT would be a competitor), pre-biotics, and expansion of biofuels may result in sales growth well above current portfolio’s pace, expanding both absolute sales and percent of sales coming from faster-growing, less economically sensitive markets, thereby improving RYAM’s secular growth and profitability metrics and the company’s stability over the economic cycle.
Whether one looks at RYAM as a low value-add commodity play or a cyclically-affected business going through a difficult economic phase, company valuation multiples appear low by historical standards, especially when discounting the potential for mix and profitability improvement over the next one to two years. RYAM’s current multiples have declined to levels last seen at the end of 2018, possibly indicating limited further downside, as even after a worse-than-expected 2Q23 results and continuing difficult market conditions, management reduced its 2023 EBITDA outlook by a modest $15 million, seeing sequential profit recovery over the balance of the year, further supporting the thesis that the company’s addressable markets are nearing a trough, if not already having passed through it. We also note that with $60-70 million a year in FCF generation potential and most if not all of it being used to reduce net debt, the market cap portion of enterprise value would increase even if the overall EV multiple does not change.
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