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Why Wolf Hill Capital Likes Kraton Corp (KRA)

Wolf Hill Capital, a relatively new fund that was formed in March of this year, recently released their Q3 letter, and Insider Monkey is here to cover it. For the period, Wolfhill has done well, earning 11.73% in the three months, with 7.24% in July. Year to date, the fund is up 19.77% versus the S&P 500’s total return of 7.77% and the HFR equity hedge index of 6.44%.

Given that the fund has done well, let’s uncover take a look at one of Wolf Hill’s current investments, Kraton Corp (NYSE:KRA).



As for the company, Kraton Corp is a specialty chemical company that makes pine-based specialty chemicals and engineered polymers. Those products are used in everyday products such as tooth brushes, condoms, plastic gloves, etc. Wolf Hill likes the stock because it offers ‘tremendous upside potential’ due to three key reasons. First, the fund believes Kraton Corp (NYSE:KRA)’s enterprise value will move from debt to equity holders due to the company’s significant free cash flow generation. Second, as Kraton Corp (NYSE:KRA) deleverages, the fund believes the company’s valuation multiple will increase. Third Wolf Will believes Kraton Corp (NYSE:KRA) will realize earnings growth due to management unlocking merger synergies, cost savings, and due to the strong U.S. economy.

In addition, Wolf Hill notes that the company’s board and management act like owners due to the fact that they own substantial shares of restricted stock. Due to that point, the fund believes Kraton Corp (NYSE:KRA)’s guidance for the year is credible, and that the company could generate $350 million in EBITDA for 2017, and potentially as much as $500 million in 2019 due to raw material costs mean reverting and management unlocking synergies. Using a discounted peer multiple of 9x, Wolf Hill concludes that Kraton Corp (NYSE:KRA) could more than double to $100 per share in its base case scenario. KRA shares are already up 47% year-to-date.

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