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PCC Rokita – 3Q19E results’ preview

The YTD performance of alkali product prices has been much weaker than we expected at the beginning of the year. While we assumed a softening of caustic soda prices to around US$ 600 per tonne by the end of the year (from the average of US$ 675 per tonne in 2018), current benchmarks for 3Q19 have dropped to only US$ 525 per tonne and given poor GDP outlook in Europe and the extension of tariff war between China and the US, we have no reasons to become optimistic.

We attribute this year’s weak performance of caustic soda to several factors. Firstly, as the most obvious, economic slowdown in Europe has negatively affected the caustic soda market. Secondly, the abundance of cheaply offered soda from export spot markets weighted strongly on European contracts (we previously mentioned about the alarming price spread between European contracts and Asian spot markets). Thirdly, the introduction of the tariff war between the USA and China accelerated Asian exports to Europe, and indirectly, it negatively impacted local soda demand in Asia, which in turn created additional supplies destined for exports. ICIS also mentions that the environmental issues in China (and economic slowdown) had recently lowered aluminum production, reducing one of the main downstream uses of caustic soda. Moreover, ICIS further suggested that the recently relatively beneficial margins for PCV producers accelerated demand for chlorine products which as a consequence boosted caustic soda production.

Unfortunately based on the arguments provided above we think it is justified to expect the commodity prices will further fall below US$ 500 per tonne and average at only US$ 475 per tonne next year (only to rebound to US$ 500 per tonne in 2021). Having assumed visibly lower caustic soda prices than previously, we strongly cut our financial estimates for the Company. Ultimately, based on our new 12M EFV of PLN 58.0 per share for the equities, we downgrade our LT fundamental recommendation for the stock to a Hold (from Buy). The stock was apparently a major underperformer in previous months but even though it could try to regain some relative strength we downgrade our ST market-relative bias for the equities to a Neutral (from Overweigh) due to lack of meaningful positive triggers.

Given the weaker macro outlook we are also worried that the Company’s habit of paying strong dividends may be altered next year. The Company’s relatively high leverage and expected relatively lower free cash flows clearly does not give much space for dividends.