Business: Ingevity is a leading bio-based materials company that converts waste streams and by-products from the wood, paper, and pulp industry into higher-valued, specialty materials. They operate through two segments: (i) Performance Materials, which includes high-performance activated carbon and (ii) Performance Chemicals, which includes specialty chemicals and engineered polymers. The company’s products are used in a variety of applications, including asphalt paving, oil exploration and production, agrochemicals, adhesives, lubricants, publication inks, coatings, elastomers, bioplastics and automotive components that reduce gasoline vapor emissions. The Materials segment (which comprises 37% of revenue) is the global leader in the industry and turns sawdust purchased from furniture shops into activated carbon. The Chemicals segment (which comprises 63% of revenue), takes pine tree waste and separates it into sticky and oily materials that are converted into products from adhesives to lubricants to paving ingredients. The company’s products are used in vehicles to abate carbon emissions – they abate more than 40 million tons of carbon emissions per year from their product base. In layman’s terms, the company takes renewable, non-food, waste inputs, and makes products that either replace or clean up fossil-based chemistry and fuel.

Stock Market Value: $2.4B ($62.35 per share)

Percentage Ownership: 5.41%

Average Cost: $69.23

Activist Commentary: Inclusive Capital Partners is a San Francisco-based investment firm focused on increasing shareholder value and promoting sound environmental, social and governance practices. It was formed in 2020 by ValueAct founder Jeff Ubben to leverage capitalism and governance in pursuit of a healthy planet and the health of its inhabitants. As a pioneering active ESG (AESG™) investor, Inclusive seeks long-term shareholder value through active partnerships with companies whose core businesses contribute solutions to this pursuit. Inclusive is a returns-driven fund with a focus on environmental and social investing. Its primary focus is on environmental and social value creation, which leads to shareholder value creation. Inclusive is so focused on environmental value that it has created a new metric to screen and value companies: enterprise value to carbon emissions abated.

Inclusive Capital Partners has reported a 5.41% interest in NGVT for investment purposes.  

The ESG thesis is strong at Ingevity: Both of its segments have positive ESG attributes with 78% of revenue coming from renewable businesses. The Performance Materials segment takes sawdust from furniture makers and turns it into activated carbon that is used in emission controls in automobiles. Ingevity has a dominant market share in this business, selling to original equipment manufacturers. This market should grow as older cars are taken off the road and replaced by newer cars that use emission controls. The Performance Chemicals business takes pine sap waste from paper mills that would otherwise be burned and breaks it into sticky substances used for things like adhesives and road asphalt. Meanwhile oily substances replace a variety of petrochemicals in things like lubricants.

The Performance Materials segment has 45%+ EBITDA margins and mid single-digit long-term growth, and the Performance Chemicals segment has 20% EBITDA margins and mid to high single-digit long-term growth. Their blended EBITDA margins are 28%-30%, and their blended growth rate is in the mid to high single digits. 

Despite Ingevity’s market position, cash flow characteristics, and growth potential, the company trades at a discount to peers. It trades at 7.9x EBITDA with a price-earnings ratio of 11 versus peers that trade at 9-14x EBITDA and a price-earnings ratio of 17. The main reason for this is that the market does not believe the mid to high single-digit growth projections. Part of the reason that growth has been slowing a little is because of supply chain issues in the automotive industry, which should be transitory.

With the help of Inclusive as an active shareholder or board member, Ingevity can start selling more internationally and to a larger breadth of products. Moreover, in an ESG world with consumers increasingly caring about environmental issues, the company should start embracing and communicating their ESG story. Ingevity has a great ESG story, but it doesn’t realize it’s an ESG company. Not only can this attract more clients but can help them turn discount pricing into premium pricing. As an example, the company currently sells their environmentally friendly adhesives for packaging at a discount because it is brown instead of clear and smells a little like pine trees. But this is evidence of its environmentally friendly attributes. As large corporations go green, this type of adhesive could be sold at a premium.  

Inclusive will be a valuable partner in helping the Ingevity refine and communicate its ESG thesis as well as grow through ESG channels – they live and breathe sustainability. Inclusive has filed seven prior 13Ds and gained board representation in all seven situations, each time by being invited on to the board. We would expect to see the same here.   

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.