On Wednesday, Wolfe Research adjusted its financial outlook for Ashland Inc . (NYSE: NYSE:ASH), raising the price target to $114 from $108 while reaffirming an Outperform rating.
The company's shares have seen a year-to-date increase of 13.3%, surpassing the S&P 500's 5.6% gain, the Materials Select Sector SPDR Fund (XLB) at 3.6%, and the Wolfe Ingredients Index at 4.0%. This performance comes amidst a demand outlook for FY'24 deemed better than initially feared.
Ashland is currently trading at 11.6 times the next twelve months (NTM) EBITDA consensus, which is marginally higher than its five-year median of 11.1 times. This valuation suggests a balanced perspective following the de-stocking of personal care and specialty additives.
Historically, Ashland's forward trading range has fluctuated between 9.7 times, aligning with chemical intermediates, and 11.3 times, on the lower end of global ingredients.
The research firm believes that Ashland's valuation will likely remain near the midpoint of its historical range in the near term. Still, the firm posits that Ashland's valuation could climb over the coming years, driven by new product optimism, particularly in personal care, steady improvements in return on net assets (RONA), free cash flow (FCF) due to working capital drawdown, and consistent quarterly performance.
For FY'24, Ashland is expected to move beyond the inventory de-stocking in personal care and specialty additives, address perceptions of volume underperformance, and work on closing the gaps in FCF conversion and RONA compared to its European peers in personal care ingredients.
Wolfe Research suggests that while Ashland needs to consistently exceed quarterly expectations, the worst of the personal care de-stocking is likely over, as indicated by comments from companies like Estée Lauder and L'Oréal (EPA:OREP).
The updated $114 stock price target is based on a 12.0 times multiple of the projected FY25 EBITDA of $570 million, discounted back. This represents a discount of approximately 10% compared to the Ingredients Index, reflecting the need for Ashland to further prove its reliability in quarterly execution and establish itself as a top-tier supplier in the pharmaceutical and personal care sectors.
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