On November 26, 2018, United Technologies Corp.
UTX
had announced tax-free spin-off of its Otis and Carrier businesses, into new, independent publicly traded companies to be named Otis Worldwide Corp and Carrier Global Corp. On April 3, 2020, United Technologies Corp, renamed as Raytheon Technologies (NYSE: RTX, $49.93, Market Capitalization: $75.7 billion) completed the tax-free spin-off of Otis Worldwide Corp (NYSE: OTIS, $47.32, Market Capitalization $20.5 billion) and Carrier Global Corp (NYSE: CARR, $16.92, Market Capitalization $14.7 billion). Post-separation, Otis and Carrier began trading ‘Regular-Way’ on 4/3, and United Technologies completed its merger with Raytheon and began trading under the new name Raytheon Technologies. On the first day of ‘regular-way’ trading, shares of RTX opened at $51.00 and closed at $49.93 after trading between $48.05 and $53.30. Shares of Otis Worldwide Corp opened at $43.75 and closed at $47.32 after trading between $41.80 and $49.30. Similarly, shares of Carrier Global Corp opened at $13.75 and closed at $16.92 after trading between $13.38 and $17.00.

United Technologies shareholders received one (1) ordinary share of Carrier common stock, and one-half (0.5) share of Otis common stock for every one ordinary share of UTX held as of the record date of 3/19. Following the spin-offs of Otis and Carrier by United Technologies (UTX), the remaining company merged with Raytheon Co, and the combined company is named as Raytheon Technologies. Post spin-off, Raytheon will focus on defence and aerospace business while Otis will consist of Elevator business, which will focus on its electrical enclosures, electric heat tracing solutions, heat management systems, and electrical and fastening solutions, and similarly, Carrier will focus on its HVAC, refrigeration, fire and security solutions.

Valuation and Recommendation

We value Raytheon Technologies (RTX), formerly United Technologies, using 2020e EV/EBITDA methodology by valuing Raytheon and Otis (Spin-Off 1) & Carrier (Spin Off 2) separately. Our fair value of $58.00 is based on 2020e EV/ EBITDA multiple of 8.0x for Pratt & Whitney, 8.0x for Collins Aerospace and 7.5x for the Raytheon business. We arrive at an average intrinsic value for Raytheon Technologies (RTX) at $58.00 per share. We initiate coverage on RTX with a ‘Buy’ rating and an implied upside of 16.2% from the current market price of $49.93 as on 4/3. The current valuation factors in the slowdown of the aerospace industry caused by the COVID-19 pandemic, which has hit aerospace companies, especially Boeing
BA
, which has disrupted the aerospace supply chain. Our average fair value estimate for Otis (Spin-Off 1) stands at $52.00 per share based on 2020e EV/EBITDA multiple of 13.0x. We initiate coverage on OTIS with a ‘Hold’ rating and an implied upside of 9.9% from the current market price of $47.32 as on 4/3. Our average fair value estimate for Carrier (Spin-Of 2) stands at $21.50 per share based on 2020e EV/ EBITDA multiple of 9.8x. We initiate coverage on CARR with a ‘Buy’ rating and an implied upside of 27.1% from the current market price of $16.92 as on 4/3. Both Otis and Carrier will be included in the S&P 500 index; so there will be no index-based selling.

Investment Thesis

Transformation into leading platform-agnostic Aerospace & Defense provider

Following the spin-off of Otis and Carrier, United technologies merged with Raytheon Co on 4/3 to form Raytheon Technologies. The merger of United Technologies and Raytheon has brought together two aerospace and defense leaders with long track records of industry-defining innovation in their respective sectors. With the highly complementary portfolios and the opportunity to combine world-class R&D platforms, the companies can effectively invest, innovate, and serve customers. This would be critical, given the complex and rapidly evolving industry landscape. The merger has enabled the two companies to be even better positioned to address the highest priorities of customers for the future particularly in the fast-growing A&D segments like expected to achieve more than $1 billion of gross annual run-rate cost synergies by year 4 postclose. The companies are also expected to have significant revenue synergy opportunities from the technologies. The all-stock merger structure will allow shareowners of both companies to participate in the future upside potential of the combined businesses.

The combined company’s expected enhanced technology and research and development capabilities, with a combined annual company and customer funded R&D spend of approximately $8 billion, over 60,000 engineers and 38,000+ patents, would help the combined company develop advanced products to meet customer priorities and the national defense strategies of the United States and its allies. Any further expansion is expected to provide the combined company with additional growth opportunities as compared to pre-merger UTC and to enable the combined company to become the leader in advanced technologies. Also, factoring in the impact of COVID-19, the company is expected to have strong cash-flows and revenues post 2020, factoring in the time required for the economy and business to recover from the pandemic.

Carrier and Otis Well Positioned In the Market Place Post Spin-Off

Carrier and Otis businesses can operate on a stand-alone basis. Upon separation, each company has the strategic focus, nimbler organizational & operating model, and financial flexibility to deliver innovative customer solutions and drive long-term value. As part of that capital allocation independence, each company will be able to pursue its growth strategies through M&A, supported by its independent equity currencies. Each business will also have the opportunity to attract a distinct shareowner base aligned to its growth profile and capital allocation priorities, and more appropriately aligned management, and employee incentives, all of which we believe will lead to a stronger business and create greater value over the long term.

OTIS manufactures people-moving products, including elevators, escalators, and moving walkways under its Otis business. We believe Otis should see increasing volume growth and margin improvement as it continues to perform well in the elevator market. Carrier business provides heating, ventilating, air conditioning (HVAC), refrigeration, fire, security, and building automation products, solutions, and services for residential, commercial, industrial, and transportation applications. For FY19, the business delivered a subdued performance and we expect the business to have slightly lower revenue and EBIT growth over the next two years.

Valuation

A] Raytheon Technologies: Raytheon Technologies Corporation is an aerospace and defense company that provides advanced systems and services under four industry leading businesses – Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space and Raytheon Missiles & Defense.

EV/EBITDA Valuation: We value Raytheon Technologies at $58.00 per share based on 2020e EV/ EBITDA multiple of 8.0x for Pratt & Whitney (~3% premium to its peer median multiple), 8.0x for Collins Aerospace (at ~10% premium to its peer median multiple), and 7.5x for Raytheon. The current valuation factors in the decline in the multiples due to the impact of COVID-19 virus and the resulting economic slowdown.

B] Otis Worldwide Corporation (Spin-Off 1): UTX manufactures people-moving products, including elevators, escalators, and moving walkways under its Otis business. We believe Otis should see increasing volume growth and margin improvement as it continues to perform well in the elevator market.

EV/EBITDA Valuation: We value Otis at $52.00 per share by applying 2020e EV/EBITDA multiple of 13.0x. The assigned multiple is at a 9.7% discount to its median peer multiple. We expect 2020 EBITDA of $2,175 million for Otis factoring in the strong operational performance in FY19.

C] Carrier Global Corporation (Spin-Off 2):

Carrier business provides heating, ventilating, air conditioning (HVAC), refrigeration, fire, security, and building automation products, solutions, and services for residential, commercial, industrial, and transportation applications. For FY19, the business delivered a subdued performance and we expect the business to have slightly lower revenue and EBIT growth over the next two years.

EV/EBITDA Valuation: We value Carrier at $21.50 per share by applying 2020e EV/EBITDA multiple of 9.8x. The assigned multiple is at a 3.9% discount to its median peer multiple.

Company Description

Raytheon Technologies (RTX) (Parent)

Raytheon Technologies Corporation is an aerospace and defense Company that provides advanced systems and services for commercial, military and government customers worldwide. It comprises four industry-leading businesses – Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space and Raytheon Missiles & Defense. With a total employee strength of 195,000, the company delivers solutions that push the boundaries in quantum physics, electric propulsion, directed energy, hypersonics, avionics and cybersecurity. The company, formed through the combination of Raytheon Company and the United Technologies Corporation aerospace businesses, is headquartered in Waltham, Massachusetts.

Otis Worldwide Corp (Spin-Off 1)

Otis Elevator Company is the world’s leading manufacturer of people-moving products, including elevators, escalators, and moving walkways, with significant recurring revenue from long-term maintenance contracts. Founded 165 years ago, Otis a leader in the approximately $75 billion global elevator and escalator industry. The Otis brand is recognized across the globe, and our products are installed in some of the world’s most recognizable buildings. The company has a network of more than 69,000 employees, including approximately 1,300 engineers, 4,200 sales employees and 40,000 field technicians. Otis serves customers in over 200 countries and territories and support over two million maintenance units under contract. Otis currently holds more than 2,500 active patents globally and have fi led approximately 2,900 additional patent applications globally over the last three years. Otis recorded sales of $13.1 billion in FY19.

Carrier Global Corp (Spin-Off 2)

Carrier is a leading global provider of innovative HVAC, refrigeration, fire, security, and building automation technologies. Supported by the iconic Carrier name, the company’s portfolio includes industry-leading brands such as Automated Logic, Carrier Transicold, Edwards, GST, Kidde, LenelS2 and Marioff. Carrier’s businesses enable modern life, delivering effi ciency, safety, security, comfort, productivity and sustainability across a wide range of residential, commercial and industrial applications. Carrier has an extensive global footprint with approximately 53,000 employees globally, including over approximately 3,600 engineers, and its solutions are sold in over 160 countries around the world. Carrier recorded sales of $18.6 billion in FY19.



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