The Chemistry Isn't Right With Nexeo Solutions

Credit Suisse has initiated coverage of Nexeo Solutions, Inc. (WL Ross Holding Corp (NASDAQ: NXEO))* with a Neutral rating and $8.50 price target, as it sees several risks to the name that could weigh on sentiment and valuation.

Nexeo, being the third largest chemical distributor in the North America, is exposed to double-digit pricing declines in the chemical distribution market.

"We think continued stagnant pricing and weaker demand will weigh on a highly levered (4.4x debt/EBITDA) small-cap name," analyst Andrew Buscaglia wrote in a note.

The analyst noted Nexeo has a much lower margin profile versus peers with a fair amount of catch-up that hinges on market improvement and execution. However, the analyst remains on the sidelines on a recent miss/guidance cut.

"EBITDA guidance of 20 percent y/y growth in 2017 seems ambitious, posing further risk," Buscaglia continued.

Related Link: Deutsche Initiates Coverage On Nexeo With A Buy Rating

However, the cheap valuation provides downside support as NXEO currently trades at 7.8x CS' 2017 EBITDA estimate of $193 million, a discount to peers UNVR and Brenntag at about 10x. That said, the analyst doesn't see the valuation moving any lower at this point, which keeps him Neutral.

Over the long term, the analyst believes the company's investments in to its operations should drive margins as excess capacity is utilized and would benefit from industry consolidation.

"As end markets improve and Nexeo executes, we see potential for long-term multiple expansion," Buscaglia added.

*The newly combined company is comprised of the previously separate WL Ross Holding Corp (NASDAQ: WLRH) and Nexeo Solutions Holdings, LLC.

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