KEMET Corporation (KEM)

Seamus Sullivan

The Company

Recommendation: Buy Price Target - $11.27

Current Price $5.00

52-week range $10.60 – 3.69

Market Cap 464.4M

P/E (2013) N/A

EV/EBITDA (2013) 6.2X

The Company

• Founded in 1919

• IPO 1992

• Headquarters: Sampsonville, SC

• Per-Olof, CEO

• 22 locations in 10 countries as of Q2

• 10,000 employees, ~ 600 in US, 5,000 in

Mexico and the rest evenly divided between

Asia and Europe

• Sector: Capacitor Manufacturer

The Company

The Company reports three key segments that drive valuation.

1. Tantalum Business: 10% Op margins and ~42% of revenue. Controls ~ 20% of the market and the third largest maker of tantalum capacitors is KEM's future partner NEC-Tokin with ~15%

2. Ceramic Business:17% Op margins and ~22% of revenue.

3. Film $ Electrolytic ("F&E"): -7% Op margins and ~36% of revenue. Industry leader.

Catalysts

Achievement of:

• Margin Improvement

– Vertical integration

• Niotan acquisition (now KEMET Blue Powder)

• Reduction in raw material costs that will yield a benefit of $10-$15MM in FY 2013 and

$40MM in FY2014

• F&E Operating Margin Improvements

– Resulting in ~ $6MM lower costs in Europe FY2013

– FY2015 management expects full realization of restructuring plan achieving total

annualized operational cost reductions of ~$25-30MM vs. FY2012

• Realignment initiatives

– Worldwide reduction in workforce

– Consolidation and relocation of manufacturing to lower-cost regions

– Reduction of operating costs/leverage

• Resulting in a lower break even point (~$196-206MM per Q or $784-824MM per FY)

• Acquisition NEC-Tokin

– Received regulatory approval of JV from China Antitrust 12/31/12

Acquisitions • Niotan

– $75MM + $10MM in royalty payments

• $30MM at closing

• $45MM over thirty months

– Makes KEMET the only completely vertically-integrated tantalum capacitor manufacturer in the world

• NEC-Tokin

– $755MM FY2011

– 10% EBITDA

– Total purchase price if consolidated would be $350MM

– No debt placed on KEMET’s Balance Sheet

– “option upside”

Kemet CorpDiscounted Cash Flow Analysis($ in millions, fiscal year ending March 30) Operating Scenario Base

Operating Scenario 1

Mid-Year Convention N Historical Period CAGR CAGR

2009 2010 2011 ('09 - '11) 2012 2013 2014 2015 2016 2017 ('13 - '17)

Sales $804.4 $736.3 $1,018.5 12.5% $984.8 $837.1 $904.1 $949.3 $1,234.1 $1,283.4 5.4%

% growth NA (8.5%) 38.3% (3.3%) (15.0%) 8.0% 5.0% 30.0% 4.0%

COGS 729.1 611.6 752.8 775.7 703.2 741.3 730.9 950.2 962.6

Gross Profit $75.3 $124.7 $265.6 87.8% $209.2 $133.9 $162.7 $218.3 $283.8 $320.9 8.9%

% margin 9.4% 16.9% 26.1% 21.2% 16.0% 18.0% 23.0% 23.0% 25.0%

SG&A 93.5 86.1 104.6 80.9 90.4 85.9 90.2 113.5 116.8

EBITDA ($18.2) $38.6 $161.0 - $128.3 $43.5 $76.8 $128.2 $170.3 $204.1 9.7%

% margin (2.3%) 5.2% 15.8% 13.0% 5.2% 8.5% 13.5% 13.8% 15.9%

Depreciation & Amortization 58.1 52.6 52.9 44.1 41.9 38.0 28.5 37.0 38.5

EBIT ($76.3) ($14.0) $108.1 - $84.1 $1.7 $38.9 $99.7 $133.3 $165.6 14.5%

% margin (9.5%) (1.9%) 10.6% 8.5% 0.2% 4.3% 10.5% 10.8% 12.9%

Taxes (26.7) (4.9) 37.8 29.4 0.6 13.6 34.9 46.6 57.9

EBIAT ($49.6) ($9.1) $70.3 - $54.7 $1.1 $25.3 $64.8 $86.6 $107.6 14.5%

Plus: Depreciation & Amortization 58.1 52.6 52.9 44.1 41.9 38.0 28.5 37.0 38.5

Less: Capital Expenditures (30.5) (12.9) (35.0) (49.3) (48.6) (38.9) (38.0) (43.2) (44.9)

Less: Increase in Net Working Capital 32.6 (15.0) 3.6 (30.9) 7.7

Unlevered Free Cash Flow $27.0 $9.4 $58.9 $49.5 $108.9

WACC 11.0%

Discount Period 1.0 2.0 3.0 4.0 5.0

Discount Factor 0.90 0.81 0.73 0.66 0.59

Present Value of Free Cash Flow $24.3 $7.6 $43.1 $32.6 $64.7

Projection Period

Enterprise Value Implied Perpetuity Growth Rate

Cumulative Present Value of FCF $172.3 Enterprise Value $778.3 Terminal Year Free Cash Flow (2017E) $108.9

Less: Total Debt (361.2) WACC 11.0%

Less: Preferred Securities 6.9 Terminal Value $1,020.3

Terminal Year EBITDA (2017E) $204.1 Less: Noncontrolling Interest

Exit Multiple 5.0x Plus: Cash and Cash Equivalents 160.5 Implied Perpetuity Growth Rate 0.3%

Terminal Value $1,020.3

Discount Factor 0.59 Implied Equity Value $584.5 Implied EV/EBITDA

Present Value of Terminal Value $606.0 Enterprise Value $778.3

% of Enterprise Value 77.9% Implied Share Price 51.8 LTM 9/30/2012 EBITDA 102.5

Enterprise Value $778.3 Implied Share Price $11.27 Implied EV/EBITDA 7.6x

Terminal Value

Implied Equity Value and Share Price

Assumptions

Sales (% growth) NA (8.5%) 38.3% (3.3%) (15.0%) 8.0% 5.0% 30.0% 4.0%

COGS (% sales) 90.6% 83.1% 73.9% 78.8% 84.0% 82.0% 77.0% 77.0% 75.0%

SG&A (% sales) 11.6% 11.7% 10.3% 8.2% 10.8% 9.5% 9.5% 9.2% 9.1%

Depreciation & Amortization (% sales) 7.2% 7.1% 5.2% 4.5% 5.0% 4.2% 3.0% 3.0% 3.0%

Capital Expenditures (% sales) 3.8% 1.8% 3.4% 5.0% 5.8% 4.3% 4.0% 3.5% 3.5%

Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%

Working Capital (% sales) 18.8% 19.1% 17.8% 16.2% 15.0%

Valuation

Valuation

• Inventory days show the

cyclicality of the sector

and are reaching prior

resistance and standard

deviation

• KEMET has only

traded below

Tangible book value

four time in the last

10years

Risks to my call

• Execution risk with the four most significant items being achieving the:

1) $40MM expected from vertical integration of the tantalum supply chain

2) $25MM expected from the phase two of the F&E segment

3) Additional $25MM expected from the incremental operating margin improvements

announced on July 26th

4) Joint venture with NEC Tokin

• KEMET's end markets are cyclical and a potentially extended global economic

slowdown creates challenges which may be compounded by the high fixed costs

associated with the business and KEMET's operating leverage. As with any leverage,

it is a double edged sword

• Substitution of tantalum by other dielectrics given its high relative cost

• Inability to realize benefits from the F&E restructuring program

• KEMET is trading at a 22% discount to Tangible Book Value

• KEMET LTM TEV/EBITDA is 7x versus the comparables average of 14x

• Strong history of positive fee cash flow generation

• As a result of the Niotan acquisition KEMET is now the only completely vertically-

integrated tantalum capacitor manufacturer of any appreciable size in the world.

• NEC Tokin full combination provides potential for substantial longer-term benefits and

value creation and would also make KEMET the market leader, at 35%, in tantalum

capacitors

– Tantalum is projected to grow at a CAGR of 11.8%1, which makes it the fastest growing

segment

• Management believes in the restructuring and strategic initiatives.

– This is evident by management as well as directors spending $455,400 in aggregate to

purchase shares in 20012, primarily in May, at prices $5.38-5.77

• Once these initiatives are in place KEMET will be well positioned for substantial gains

1: Paumanok Publications Research

Summary