Schweitzer-Mauduit International, Inc.

SWM Details

Schweitzer-Mauduit International, Inc. (NYSE: SWM) manufactures and produces engineered solutions and materials for various industries. Its revenue-generating segments are 1) Advanced Materials & Structures (AMS), focused on producing resin-based rolled goods such as nets, films, meltblown materials, bonding products, adhesive components, etc., for specialty operations, and 2) Engineered Paper (EP), which manufactures cigarette paper and reconstituted tobacco products (Recon) for the tobacco industry. As of November 04, 2021, SWM's market capitalization stood at USD 1.01 billion.

Latest News:

• Signing Licensing Agreement: On October 19, 2021, SWM's business unit Scapa Healthcare signed a global technology licensing agreement with Synedgen Inc., a biotechnology company focused on the innate immune system, covering two innovative wound care treatments devised using Synedgen's patented glycochemistry technology platform. Scapa Healthcare has the right to use glycopolymer technology and other wound care technologies for skin wounds and surgical care applications under the contract terms.

Q3FY21 Results:

• Surge in Sales: The company reported a 37.34% increase in net sales to USD 383.6 million in Q3FY21 (ended September 30, 2021) from USD 279.3 million in Q3FY20, resulting primarily from the Scapa Healthcare acquisition completed in April 2021.
• Decline in Net Income: Q3FY21 net income was USD 12.2 million, lower than USD 24.5 million reported in Q3FY20, owing to significantly higher general expenses (USD 41.4 million in Q3FY21 vs. USD 24.6 million in Q3FY20).
• Leveraged Balance Sheet: As of September 30, 2021, the company had cash and cash equivalents of USD 73.6 million and total debt of USD 1.31 billion.
• Dividend Declaration: In its Q3FY21 earnings release, SWM declared a quarterly dividend of USD 0.44 per share, payable in cash to shareholders of record on November 26, 2021, on December 17, 2021.

Key Risks:

• Customer Concentration Risk: In FY20, revenue for SWM's top four customers represented over 28% of its net sales. Hence, the loss of such vital customers could hurt its financials.
• Dependence of Few Manufacturing Facilities: The company has a single manufacturing facility in France that produces reconstituted tobacco leaf (RTL) and a single facility in Ancram, New York, making wrapper and binder goods. As a result, any interruption in the manufacturing process could harm the company's operations.

Outlook:

• Q4FY21 Estimates: In its Q3FY21 earnings release, the company stated that due to the impact of inflation and supply chain constraints, it expects its Q4FY21 adjusted EPS to be 20% lower than the reported numbers in Q4FY20.
• FY22 Guidance: It anticipates robust growth in its operating profits in FY22, with the industry-wide supply chain conditions coming back normal.

Valuation Methodology: EV / EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

SWM Daily Technical Chart (Source: REFINITIV)

Stock Recommendation:

SWM's stock price fell 32.83% in the past six months and is currently close to the lower end of its 52-week range of USD 31.76 to USD 50.79. The stock is currently trading below its 50 and 100 DMA levels, and its RSI Index is at 35.18. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 40.52.

Considering the significant correction in the stock price, strong topline performance, consistent dividend yield, and associated risks, we recommend a "Speculative Buy" rating on the stock at the closing price of USD 32.17, down 15.21% as of November 04, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.