Worthington Ent. Completes Spin-Off Of Worthington Steel On December 1

On November 9, 2023, Worthington Enterprises WOR announced that its Board of Directors had approved the separation of its Steel Processing business (Worthington Steel). Beginning on December 1, the Company’s name changed to Worthington Enterprises, Inc., and shares of the Company started trading on the NYSE under the symbol “WOR.” On December 1, 2023, Worthington Enterprises (NYSE: WOR, $45.56, Market Capitalization $2.3 billion) completed the tax-free spin-off of Worthington Steel, Inc. (NYSE: WS, $22.20, Market Capitalization $1.1 billion). Post separation, both companies began trading ‘Regular- Way’ on 12/1. On the first day of ‘regular way’ trading, shares of WOR opened at $47.11 and closed at $45.56 after trading between $45.51 and $47.62. Shares of WS opened at $24.10 and closed at $22.20 after trading between $22.20 and $24.99.

Worthington Enterprises distributed 100% of the outstanding shares of common stock of Worthington Steel (WS) to WOR stockholders on a pro rata basis. WOR shareholders received one ordinary share of WS for every one ordinary share of WOR held as of the record date of 11/21. Post-spin-off, Worthington Enterprises operates building products, consumer products, and sustainable energy solutions businesses. Worthington Steel operates the steel processing business. Post Spin-Off, Worthington Enterprises (WOR) remained in the S&P SmallCap 600, while Worthington Steel (WS) was added to the S&P SmallCap 600, replacing Sleep Number SNBR Corp. (SNBR), effective before the opening of trading on 12/1.

Valuation and Recommendation

We value Worthington Enterprises (WOR) using the EV/EBITDA valuation methodology. Our intrinsic value of $48.00 for WOR (Previously: $47.00) is based on a 2024e EV/EBITDA multiple of 9.3x for the Consumer Products segment (~6% premium to peer multiple of 8.7x), 8.2x for the Building Products segment (~4% premium to peer multiple of 7.9x), and 13.0x for the Sustainable Energy Solutions (~3% premium to peer multiple of 12.6x). We initiate coverage on WOR with a ‘Hold’ rating with an implied upside of 5.4% from the current market price of $45.56 as on 12/1. Our fair value estimate for Worthington Steel (Spin-Off) stands at $24.00 per share (Previously: $23.00) based on the 2024e EV/EBITDA multiple of 7.0x to Steel Processing business (~10% discount to median peer multiple of 7.8x). We initiate coverage on Worthington Steel with a ‘Hold’ rating with an implied upside of 8.1% from the current market price of $22.20 as on 12/1.

Investment Thesis

Post Spin-Off, Worthington Enterprises (RemainCo) business warrants a higher multiple

Post separation, Worthington Industries is expected to be a market-leading company with premier brands in attractive end markets in consumer products, building products and sustainable energy solutions. As WOR’s value will no longer be highly correlated to the price of steel, it is expected to provide an opportunity for premium sector multiples. Separating more cyclical steel processing business will enable Worthington Enterprises (WOR), a high-margin and less cyclical business, to attract higher multiples. In contrast, the steel processing business has lower margins and more cyclicality. Consequently, we have assigned a premium 2024e EV/EBITDA multiple of 9.3x for Consumer Products, 8.2x for Building Products, & 13.0x for Sustainable Energy Solutions compared to the assigned multiple of 7.0x to the steel processing business.

As a more focused company, Worthington Enterprises is well-positioned to capitalize on key trends in sustainability, technology, remodeling and construction, and outdoor living. Despite the current softness in demand in the near term due to inflation and higher interest rates, the Company will continue to pursue a growth strategy focused on leveraging its robust new product pipeline of sustainable, tech-enabled solutions. Furthermore, WOR is expected to have a high-margin and asset-light profile with a healthy balance sheet, enabling strong free cash flow generation and shareholder returns. Following the separation, given its sustainable competitive advantage and exposure to the less cyclical business, WOR will be well-positioned to leverage its brands, such as WAVE, Colman, Bernzomatic, ClarkDietirch, and Balloon Time, to drive organic growth, focus on strategic M&As to drive inorganic growth, and benefit from continued meaningful free cash flow deployment.

Worthington Steel (Spin-Off) poised to capitalize on key end market trends

Following the spin-off, Worthington Steel is expected to be a pure-play market-leading, value-added steel processor and producer of electrical steel laminations and automotive light weighting solutions, positioned to capitalize on expanding opportunities in electrification, sustainability and infrastructure spending. It is expected to have a differentiated capability set and sophisticated supply chain and price risk management solutions to serve its blue-chip customers, grow market share and increase margins. Moreover, Worthington Steel is expected to benefit from the return of manufacturing to the US and the Bipartisan Infrastructure Bill, which will increase steel demand. Despite risks such as commodity price fluctuations, the Company’s long-term outlook remains positive. With the market leading positions in the North American carbon flat-rolled steel and tailor welded blanks industries, further aided by the recent acquisition of Tempel Steel Company (Tempel), SpinCo has become one of the largest global producers of electrical steel lamination. Worthington Steel is uniquely positioned to capitalize on several key growth trends, including the global decarbonization of transportation (~80% of passenger vehicles sold globally in 2030 are expected to be battery or hybrid), the energy transition to renewable sources ($25 billion available in tax credits for manufacturers of renewable energy equipment), and restoration of aging American infrastructure ($1 trillion infrastructure bill signed in 2021). Additionally, Worthington Steel’s operating footprint provides strategic jurisdictional advantages due to its proximity to its suppliers and automobile OEM customer base. As a result, the Company is well-positioned to benefit from financial incentives in the form of tax credits and rebates for localizing the development of an electric vehicle ecosystem in North America and globally.

Valuation

A] Worthington Enterprises, Inc.:

EV/EBITDA Valuation: Post-spin-off, Worthington Enterprises includes the Company’s Consumer Products, Building Products, and Sustainable Energy Solutions segments. Our intrinsic value of $48.00 (Previously: $47.00) for WOR is based on a 2024e EV/EBITDA multiple of 9.3x for the Consumer Products segment (~6% premium to peer multiple of 8.7x), 8.2x for the Building Products segment (~4% premium to peer multiple of 7.9x), and 13.0x for the Sustainable Energy Solutions (~3% premium to peer multiple of 12.6x). The premium assigned to each segment factors in the value of the Company’s brand offerings and market position. We have assumed a 2024 Net Debt of $84.3 million, factoring in the ~$150 million cash payout by SpinCo to WOR (Stub) at the time of the separation. We initiate coverage on WOR with a ‘Hold’ rating with an implied upside of 5.4% from the current market price of $45.56 as on 12/1.

B] Worthington Steel, Inc. (Spin-Off):

Post-spin-off, Worthington Steel includes the Steel Processing business. Our fair value estimate for Worthington Steel (Spin-Off) stands at $24.00 (Previously: $23.00) per share based on the 2024e EV/ EBITDA multiple of 7.0x to Steel Processing business (~10% discount to median peer multiple of 7.8x) and a 2024e Net Debt of $127.3 million. The discount to median peer multiple reflects the relatively smaller business scale compared to its larger peers. We initiate coverage on Worthington Steel with a ‘Hold’ rating with an implied upside of 8.1% from the current market price of $22.20 as on 12/1.

Company Description

Worthington Enterprises, Inc. (Parent)

Headquartered in Columbus, Ohio, Worthington Enterprises, Inc. (NYSE: WOR) (formerly known as Worthington Industries, Inc.) is a market-leading designer and manufacturer of innovative Building Products, Consumer Products and Sustainable Energy Solutions. The Consumer Products segment provides propanefilled cylinders for torches, camping stoves and other applications; and LPG cylinders, handheld torches, helium-filled balloon kits, specialized hand tools and instruments, and drywall tools and accessories under the Coleman, Bernzomatic, Balloon Time, Mag-Torch, General, Garden-Weasel, Pactool International, Hawkeye, Worthington Pro Grade, and Level5 brands. The Building Products segment offers LPG cylinders, well water and expansion tanks, and other specialty products, including fire suppression tanks, chemical tanks, foam, and adhesive tanks for gas producers and distributors. The Sustainable Energy Solutions segment sells onboard fueling systems, related services, gas containment solutions, and services for storing, transporting, and distributing industrial gases. It provides high-pressure and acetylene cylinders for life support systems and alternative fuel cylinders to hold CNG and hydrogen for automobiles, buses, and light-duty trucks. In FY23, Worthington Enterprises generated total revenue of ~$1.4 billion.

Worthington Steel (Spin-Off)

Following the separation, Worthington Steel will be a best-in-class, value-added steel processor and producer of electrical steel laminations and automotive lightweight solutions, positioned to capitalize on expanding opportunities in electrification, sustainability, and infrastructure spending. Worthington Steel will have a unique capability set and sophisticated supply chain and pricing solutions to serve its blue-chip customers, grow market share and increase margins. The Company will continue leveraging the Worthington Business System to power a winning culture, higher growth, and profitability through Transformation, Innovation, and Acquisitions. For FY23, Worthington’s Steel Processing business generated sales of ~$3.5 billion.