Here’s how Inclusive Capital could help materials company Ingevity address its ESG narrative
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Company: Ingevity (NGVT)
Business: Ingevity is a leading bio-based materials company that converts waste streams and by-products from the wood, paper and pulp industry into higher value specialty materials. They operate through two segments: (i) Performance Materials, which includes high performance activated carbon and (ii) Performance Chemicals, which includes specialty chemicals and engineered polymers. The company’s products are used in a variety of applications, including asphalt paving, oil exploration and production, agrochemicals, adhesives, lubricants, publishing inks, coatings, elastomers , bioplastics and automotive components that reduce gasoline vapor emissions. The Materials segment (which accounts for 37% of sales) is the world leader in the industry and transforms sawdust purchased from furniture stores into activated carbon. The Chemicals segment (which accounts for 63% of revenue) recovers pine waste and separates it into sticky, oily materials that are converted into products ranging from adhesives to lubricants to paving ingredients. The company’s products are used in vehicles to reduce carbon emissions – they reduce over 40 million tonnes of carbon emissions per year from their product base. Simply put, the company uses renewable, non-food and waste inputs and manufactures products that replace or clean up fossil-based chemicals and fuels.
Market value: $2.4 billion ($62.35 per share)
Activist: Inclusive Capital Partners
Percentage of ownership: 5.41%
Average cost: $69.23
Activist Comment: Inclusive Capital Partners is a San Francisco-based investment firm focused on increasing shareholder value and promoting good environmental, social and governance practices. It was formed in 2020 by ValueAct founder Jeff Ubben to leverage capitalism and governance in pursuit of a healthy planet and the health of its people. As a pioneering Active ESG Investor (AESG™), Inclusive seeks long-term shareholder value through active partnerships with companies whose core businesses provide solutions to this pursuit. Inclusive is a return-driven fund focused on environmental and social investing. Its main objective is the creation of environmental and social value, which leads to the creation of shareholder value. Inclusive is so focused on environmental value that it has created a new metric to screen and evaluate businesses: business value versus reduced carbon emissions.
What is happening
Inclusive Capital Partners has declared a 5.41% stake in NGVT for investment purposes.
In the wings
The ESG thesis is strong at Ingevity: its two segments have positive ESG attributes, with 78% of revenues coming from renewable companies. The Performance Materials segment recovers sawdust from furniture manufacturers and transforms it into activated carbon used in automobile emissions control. Ingevity has a dominant market share in this sector, selling to original equipment manufacturers. This market is expected to grow as older cars are taken off the road and replaced with newer cars that use emission controls. The Performance Chemicals business takes waste pine sap from paper mills that would otherwise be burned and breaks it down into sticky substances used for things like adhesives and road asphalt. Meanwhile, oily substances replace a variety of petrochemicals in things like lubricants.
The Performance Materials segment has EBITDA margins above 45% and long-term mid-single-digit growth, and the Performance Chemicals segment has EBITDA margins of 20% and long-term mid-to-high single-digit growth. Their blended EBITDA margins are 28% to 30% and their blended growth rate is between the mid and high numbers.
Despite Ingevity’s market position, cash flow characteristics and growth potential, the company is trading at a discount to its peers. It trades at 7.9x EBITDA with a price/earnings ratio of 11 compared to its peers which trade at 9-14x EBITDA and a price/earnings ratio of 17. The main reason for this is that the market does not believe that the single medium to high-digit growth projections. If growth is slowing down a bit, it’s partly because of supply chain issues in the auto industry, which are expected to be transitory.
With the help of Inclusive as an active shareholder or board member, Ingevity can start selling more internationally and to a wider range of products. Additionally, in an ESG world where consumers increasingly care about environmental issues, the company should begin to embrace and communicate its ESG story. Ingevity has a great ESG story, but they don’t realize they are an ESG company. It can not only attract more customers, but also help them turn discount prices into premium prices. For example, the company is currently selling its eco-friendly packaging adhesives at a discount because they are brown instead of clear and smell a bit like pine. But it is the proof of its ecological qualities. As big companies go green, this type of adhesive could come at a premium.
Inclusive will be a valuable partner in helping Ingevity refine and communicate its ESG thesis as well as grow through ESG channels – they live and breathe sustainability. Inclusive filed seven prior 13Ds and obtained board representation in all seven situations, each time by being invited to the board. One would expect to see the same here.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments 13D. Squire is also the creator of the AESG™ investment category, an activist style of investing focused on improving the ESG practices of portfolio companies.