Goldman Reinstate Coverage On Westlake Chemical, Sees 3% Downside

Goldman Sachs reinstated coverage of Westlake Chemical Corporation WLK at Neutral with a $51 target price.

The brokerage said the acquisition of PVC producer Axiall Corporation makes strategic sense for Westlake by shifting exposure to a potential chlor-alkali upcycle from declining U.S. ethylene margins.

"We believe that US ethylene margins have peaked this cycle and that, prior to the deal, WLK was the purest way for investors to invest in shrinking ethane-ethylene margin spreads in our coverage," analyst Robert Koort wrote in a note.

On the other hand, Koort noted that Westlake can offset the ethylene downcycle via earnings growth from a potential upcycle in chlor-alkali combined with deal-related cost synergies (about $100 million) and an ongoing cost cutting program at Axiall (about $60 million).

"However, we are not convinced that near-term chlor-alkali industry operating rates (currently below 80% globally) are strong enough yet to support sustained profitability improvement, and believe this mark is still several years away," Koort highlighted.

The analyst raised his 2016/17/18 EPS estimates to $3.95/ $4.44/$3.43 from $3.69/$3.63/$2.09 following the deal and recent changes in commodity prices.

Koort sees upside potential from increasing operating rates potentially balancing concerns around decreased ethylene profitability, while the sell-side consensus is undervaluing strong moves in ethylene chain margins.

"Conversely, we believe looming ethylene and polyethylene supply over the next three years will impact margins most in 2018, resulting in our estimates that are 11% below consensus," Koort added.