APD Secures 25% Stake in AHG - Analyst Blog

Air Products & Chemicals Inc. (APD) is all set to acquire a 25% stake in the gases and equipment businesses of Abdullah Hashim Industrial Gases & Equipment Co. Ltd. (AHG), a privately-owned company by the Abdullah Hashim Group, Saudi Arabia. The financial terms of the deal are not yet disclosed.

Air Products and AHG have a long-standing relationship and currently operate two joint ventures. The first one is an on-site facility supplying oxygen and nitrogen for Shadeed Iron & Steel's production plant in the Sohar Industrial Port of Oman. The second plant supplies nitrogen and hydrogen to Emirates Float Glass in Abu Dhabi, the United Arab Emirates.

Air Products built the first ever air separation unit (ASU) in the Middle East in the 1950s and has 40 years of operating experience in the region. AHG is the largest private industrial gases company in Saudi Arabia.

In July 2011, Air Products reported third-quarter fiscal 2011 EPS of $1.46 versus $1.17 in the year-earlier quarter, matching the Zacks Consensus Estimate of $1.46. The results exclude a 4-cent gain in discontinued operations recognizing a tax benefit from the sale of the company's U.S. healthcare operations in 2009.

Net sales amounted to $2.6 billion versus $2.3 billion in the prior-year quarter, moving ahead of the Zacks Consensus Estimate of $2.5 billion. The improved results were mainly driven by higher volumes in the Electronics and Performance Materials and Tonnage Gases segments.

The company witnessed strong volume growth across a number of businesses mainly in the Asia Merchant business and the energy and electronics markets. However, the U.S. and Europe Merchant businesses witnessed slower growth.

For the quarter ahead, the company forecasts strong revenue growth in the Tonnage, and Electronics and Performance Materials segments. The company also expects to improve margins in the next quarter based on its actions to improve Merchant segment performance.

Management expects fourth-quarter EPS between $1.48 and $1.53. The company raised its full fiscal year EPS guidance between $5.70 and $5.75 per share from $5.65 and $5.75 previously.

Last month, the company also announced new financial targets for the 2015 timeframe. The company expects to deliver top-line growth of 11% to 13% per year over the next four years, which would boost its total revenue to over $15 billion in 2015. Air Products also expects to improve its operating margin to 20% and its return on capital to 15% by 2015.

Based in Pennsylvania, Air Products benefits from a long-term take-or-pay contract, a consolidated industry structure, a diverse customer base and sustained pricing power. However, soaring energy and raw material costs pose a threat to margin expansion.

In order to compensate for escalating raw material costs, Air Products has been increasing the price for a range of chemicals it manufactures for industrial use. Air Products faces stiff competition from Praxair Inc. (PX) and The Linde Group.

We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.