Ciech – 3Q19E results’ preview
This year the equities of Ciech were a strong underperformer due to several factors. Firstly, the Company’s recent quarterly showings were a clear disappointment (the FY19 EBITDA will probably be flat in a yoy comparison despite very bullish expectations at the beginning of the year). Secondly, the Company’s numerous tax cases and related cash outflows were a huge shock to investors. Thirdly, the situation in Romania and the very probable closure of CSR were surely unexpected. Finally, the deterioration of cash flow performance and strong increase in leverage lead to a halt in dividend payments which must have additionally weighted on the share market price.
Seeing the equity share market price of Ciech drop to the level of around PLN 30-32 per share and believing that it has already discounted a lot of risk factors, we have become positive towards the stock (Buy + Overweight, 12M EFV of PLN 43.0 per share). We are relatively bullish on the Company’s results in 2020 and 2021. Firstly, we expect the new baking soda and salt investments to gradually kick in, adding roughly PLN 100 million to the Company’s annual EBITDA. Secondly, we think the relatively tight soda ash market may even lead to slight increases in contract prices in next year. Thirdly, in the organic segment we continue to expect the registrations of new plant protection agents to have visible positive EBITDA contribution. We do not believe that the management’s PLN 900 million LT EBITDA target is feasible. But based on our LT recurring EBITDA estimate for the Company of PLN 800 million, we still see ample fundamental upside.
Please note that in our financial forecasts we assume the Company will pay all the tax amounts that are currently required by tax authorities, however, we do not include any new unpublished tax cases. Furthermore, we assume Ciech will decide to permanently close operations in Romania (in our DCF valuation we recognize an additional liability of PLN 50 million tied to potential closing costs of CSR). The exclusion of the subsidiary has marginal impact on our consolidated EBITDA estimates.
Ciech is engaged in the production, trade and distribution of chemicals as well as comprehensive service activities directed at the domestic and foreign market. The main products sold by Co. are soda ash, TDI, plastics, resins, chemical fertilizers, plant protection chemicals, glass blocks and glass packaging, salt and other chemicals.
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