Why you should buy Brenntag shares


We estimate the fair value of Brenntag shares to be around 95 euros per share by 2027, including dividends.

This offers a significant upside on the current price (at the time of writing) of 65 euros.

There are four parts to achieving fair value.

why you should buy brenntag shares

How to achieve fair value

Firstly, we assume gross profit will continue expanding at a rate of 3% each year - 3% from M&A and 1% from organic growth. The 4% growth is conservative compared to both company targets and the 7% historical growth.

Secondly, we assume that the contribution margin (EBITA over gross profit) remains at 30%. This is in line with the long-term history and well below the 36% target set by management.

Thirdly, we assume a 12 times EV/EBITA exit multiple in 2027, below both peer averages and the company specific long-term average.

Finally, we expect the company to continue paying roughly 40% of its free cash flow in the form of dividend, delivering additional 3% yield a year.

What Brenntag does

Brenntag is a German chemical and ingredients distributor with more than 17,500 employees that provides tailor-made application, marketing and supply chain solutions operating in a unique global network of about 600 locations in 72 countries.

The business is split into two divisions - Specialties and Essentials ­- and both are leaders in their respective fields of distribution.

Brenntag strategy and outlook  

Chemical distribution is a very fragmented market. Brenntag is the market leader with a market share of just 5%.

It connects chemical manufacturers like Solvay and BASF with chemical users (typically small and medium enterprises).

There are several characteristics that we like about Brenntag's model.

First, the business is capital-light. There are no manufacturing facilities.

The biggest tangible assets are the warehouses and working capital. Goodwill and intangibles are roughly a third of total assets. Average ROIC on a through-cycle basis is in the mid-teens.

Second, high fragmentation means vast potential for M&A. Brenntag has closed over 100 deals since 2010, expanding and deepening its global reach and scale.

M&A has added 3% on average to sales growth with this trend expected to continue well into the future. Acquisitions are generally accretive, with transaction multiples lower than the average trading multiples for Brenntag.

Third, the balance sheet is clean and cash conversion high. Current net debt to EBITDA is sitting at just 1.6x with an explicit cap set by management of 2.0x.

Roughly 95% of net income since 2013 has been converted into free cash flow of which half has been returned to shareholders and half has been spent on acquisitions.

Finally, there is low gross and operating profit variability regardless of the economic environment. Brenntag's sales of chemical products are cyclical, like the rest of the chemicals industry.

But Brenntag and other distributors manage gross profits well during cyclical downturns, extracting a bigger gross profit per unit (bigger mark-up), and keeping the gross profit in absolute terms much more stable.

Even during the 2009 GFC economic slump, gross profit was down just 2% year on year vs 2008, despite a 14% drop in sales.


Since 2013 Brenntag has delivered 6% per annum total return to shareholders.

This was driven by strong growth in gross profit (6.4% pa), consistent dividend (2.5% pa), improved margin (0.4% pa) and buybacks (0.4%).

Strong fundamentals were offset by P/E de-rating that detracted returns to the tune of minus 3.8% per annum.

Future returns as discussed earlier will be supported by an attractive dividend yield at 3.3%, potential for continued top line growth and P/E re-rating.

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Chad Padowitz is the co-chief investment officer and co-founder of Talaria (previously Wingate Asset Management). He has more than 20 years' experience in the financial services industry in the UK, South Africa and Australia. His experience includes working as an analyst in the treasury department at HSBC Bank in London, in derivative reporting and analysis, and as an equities research analyst at First National Bank in South Africa. In 1998 Chad co-founded Aurica Financial Services in South Africa, a private client asset management company. In 2001, this was sold to Anglorand and Chad moved to Melbourne where he joined AXA Asia Pacific in 2003 in the role of investment specialist in equities and fixed income. Chad holds a Bachelor of Commerce from the University of the Witwatersrand (South Africa), is a Fellow of the Financial Services Institute of Australasia and is a chartered financial analyst charterholder.