This series cuts through market noise to explore what we believe are the most relevant and inevitable global trends for investors seeking growth.
In it, we take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA” (Mass Affluence, New Technology, Restructuring and Aging).
As with so many things in life, the growth drivers of our MANTRA investing philosophy are symbiotic. This is especially true of New Technology and Restructuring. New Technology is a constant sculptor of the economy, whether looked at as a disruptor of older methods and markets or as an enabler of new opportunities. Would China have been able to become the “world’s factory” without the computer technology that enabled just-in-time inventory? Would call centers in India be cost effective for American Express customers in America without fiber optic cable?
One effect of this world-flattening globalization is the tremendous pressure it’s putting on companies to increase efficiency. They are upgrading software, outsourcing non-core functions, and finding better, cheaper ways to get supplies and distribute products. As they do so, they are creating opportunities for what we call the Justifiable Middleman. The chemical distribution firm Brenntag is one such beneficiary.
Brenntag is the largest chemical distribution company in the world. The German firm’s 13,000 employees in 450 locations in 70 countries around the globe offer one-stop shopping to 170,000 customers and one-channel distribution to chemical producers. Brenntag buys chemicals in scale from the various producers, then repackages and distributes them in small – and often eclectically mixed – quantities to customers. Many buyers require further services such as just-in-time delivery, mixing, technical support, repackaging, inventory management, handling the return of empty containers.1 The B2B chemical market presents the players in it with a high degree of complexity driven by the fragmentation of both supply and demand and the high number of different substances. Brenntag’s services an intermediary reduce that complexity – and resultant costs – and are worth paying for.
Founded more than 100 years ago, Brenntag has more recently been owned by chemical conglomerates and private investors.2 Since its IPO listing in March 2010, the company has returned more than 16% annually to equity holders, even while reducing gearing levels (i.e. debt leverage). Margins have held steady over the period, typically a demonstration of pricing power. Free cash flow has been rising3 and is being used to fund acquisitions.
I believe it’s still in the early days. It’s estimated that only 9%-10% of the world’s chemicals are currently handled by third party distributors and Brenntag, one of only three global players and the one with the largest share, has less than 10% of that third-party market.4 Barriers to entry are high, particularly in North America and Europe, where it’s very difficult to obtain permission for new chemical distribution centers. This combination of entry barriers and market fragmentation within them bodes well for the market leader, offering opportunities for both organic and acquisitive growth. Brenntag is employing just such a dual approach.
1Brenntag, as of 5/28/13.
2J.P.Morgan Cazenove research, dated May 7, 2010.
3Bloomberg, as of 5/28/13
3Warburg Research research, dated May 13, 2013.
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