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Thursday, January 26, 2017 | update
Grupa Azoty: hold (reiterated)
ATT PW; ATT.WA | Chemicals, Poland
A Grain Market Rebound Likely In 2017
The current recovery in crude oil prices is likely to provide an
upward push to the prices of grains in 2017, helping the Western
European fertilizer market to continue on the rising trend started in
H2 2016, led by reduced production in and exports from China (with
urea shipments down 60% y/y in the period from September to
November 2016), hampered by rising costs of thermal coal. At Grupa
Azoty, the positive global impacts have been mitigated by increasing
costs of natural gas as local prices were raised by 14% in Q4 2016,
followed by a hike of approximately 10% in Q1 2017. As a result,
according to our calculations the Company’s respective quarterly
EBITDA results are likely to show year-over-year shrinkage of 39%
and 38%, but in Q2 2017, assuming continued expansion in fertilizer
prices, we think earnings may shift upward. We are raising our price
target on ATT from PLN 65.50 to PLN 73.90 per share, to reflect the
gains registered by comparable fertilizer producers, and we maintain
the investment rating at hold.
Current Price
PLN 70.41
Target Price
PLN 73.90
Market Cap
PLN 7.0bn
Free Float
PLN 1.6bn
ADTV (3M)
PLN 9.0m
Ownership
State Treasury
33.00%
Viatcheslav Kantor (Acron)
19.70%
NN OFE
9.96%
TFI PZU AM
8.60%
EBRD
5.75%
Others
22.99%
Business Profile
China cuts exports of synthetic fertilizers
A downward shift in global prices, paired with a sharp upward shift in the
costs of coal, prompted significant cutbacks by producers of nitrogen
fertilizers in China (coal-based ammonia plants are 50-100% more energy
intensive than facilities running on natural gas). Chinese fertilizer exports fell
as a result, with urea shipments down 76% year on year in November 2016
and 60% in the three months from September to November. The export
volume of diammonium phosphate registered a marked drop as well, with
September-November shipments from Chinese ports down 21% on the year
after a September slump of 60%.
Grupa Azoty is a fertilizer producer with a portfolio
consisting among others of nitrogen fertilizers (with
annual maximum production at 2.0-2.1mmt of
nitrate fertilizer, 0.7mmt of ammonium nitrate,
0.7mmt of ammonium sulfate, 1.2mmt of UAN, and
0.2mmt of "AdBlue" technical urea), compound
fertilizers (1.8mmt max), caprolactam (170,000
tons), PA6 (92,000 tons), melamine (96,000 tons),
plasticizers (83,500 tons), OXO alcohols (205,000
tons), and titanium white (40,000 tons). Grupa
Azoty estimates its domestic market share at 70%
in nitrogen fertilizers and 80% in multi-nutrient
fertilizers.
Polish fertilizer prices trending downward
Fertilizer prices in Poland went on a downward spiral in autumn 2016 in a
delayed reaction to the falls observed in the international markets in the first
half of the year. As a result, the benchmark margins on the main types of
synthetic fertilizers contracted during the second half of last year.
ATT vs. WIG
2017 outlook good for plastics, worse for chemicals
110
We anticipate a turnaround in the profits of Grupa Azoty's plastics business
in 2017, led by higher demand from China, coupled with increased
polyamide capacity after upgrades in the Tarnów facility. As a result we
predict that the segmental clean EBITDA will come in at around PLN 11m
this year compared to a loss of an estimated PLN 32m booked in 2016. On
the other hand, due to a tightened price spread between natural gas and
melamine, the Chemicals segment in our view is poised for 12% clean
EBITDA shrinkage in 2017 to a projected PLN 242m. The lower melamine
margins should be partly offset by higher margins on plasticizers and OXO
alcohols.
130
PLN
ATT
WIG
90
70
50
Target Price
Rating
Company
(PLN m)
Grupa Azoty
2014
2015
2016E
2017E
2018E
9,898.5
10,024.4
9,096.8
9,555.5
9,892.9
822.4
1,309.3
1,004.2
1,148.6
1,246.1
8.3%
13.1%
11.0%
12.0%
12.6%
EBIT
302.2
830.0
513.9
622.4
668.5
Forecast revision
since last update
Net profit
Revenue
Revenue
EBITDA
EBITDA margin
231.4
609.5
364.1
427.4
446.6
DPS
0.42
0.00
0.84
1.10
2.59
P/E
30.2
11.5
19.2
16.3
15.6
P/CE
9.3
6.4
8.2
7.3
6.8
P/BV
1.2
1.1
1.1
1.0
1.0
EV/EBITDA
9.9
5.9
8.2
7.6
7.2
0.6%
0.0%
1.2%
1.6%
3.7%
DYield
Company
Grupa Azoty
new
old
new
old
73.90
65.50
hold
hold
Current
Price
Target
Price
Upside /
Downside
70.41
73.90
+4.9%
2016E
2017E
2018E
-1.8%
-2.1%
0.0%
EBITDA
-16.7%
+3.0%
-1.8%
Net profit
-28.3%
+7.0%
-2.6%
Analyst:
Jakub Szkopek
+48 22 438 24 03
[email protected]
List of abbreviations and ratios contained in the report:
EV – net debt + market value
EBIT – Earnings Before Interest and Taxes
EBITDA – EBIT + Depreciation and Amortisation
P/CE – price to earnings with amortisation
MC/S – market capitalisation to sales
EBIT/EV – operating profit to economic value
P/E – (Price/Earnings) – price divided by annual net profit per share
ROE – (Return on Equity) – annual net profit divided by average equity
P/BV – (Price/Book Value) – price divided by book value per share
Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents
EBITDA margin – EBITDA/Sales
OVERWEIGHT (OW) – a rating which indicates that we expect a stock to outperform the broad market
NEUTRAL (N) – a rating which indicates that we expect the stock to perform in line with the broad market
UNDERWEIGHT (UW) – a rating which indicates that we expect the stock to underperform the broad market
Recommendations of Dom Maklerski mBanku:
A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual
recommendations are as follows:
BUY – we expect that the rate of return from an investment will be at least 15%
ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15%
HOLD – we expect that the rate of return from an investment will range from –5% to +5%
REDUCE – we expect that the rate of return from an investment will range from -5% to -15%
SELL – we expect that an investment will bear a loss greater than 15%
Recommendations are updated at least once every nine months.
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The production of this recommendation was completed on January 26, 2017, 8:35 AM.
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Strong and weak points of valuation methods used in recommendations:
DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the
significant susceptibility to a change of forecast assumptions in the model.
Relative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than
DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.
Economic profits – discounting of future economic profits; the weak point is high sensitivity to changes in the assumptions made in the valuation model.
mBank issued the following recommendation for Grupa Azoty in the 12 months prior to this publication:
Rating
hold
buy
buy
hold
hold
Rating date
2016-08-30
2016-06-07
2016-06-02
2016-02-02
2016-01-05
Price on rating day
64.79
72.00
68.20
104.00
96.30
WIG on rating day
47,427.99
45,582.80
44,700.67
44,294.89
45,356.65
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Michał Marczak
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