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Puławy – 3Q19E results’ preview

We remain positive towards the equities of PuÅ‚awy (Buy, Overweight, 12M EFV of PLN 176.5 per share). The Company’s equities have become ridiculously cheap, in our view. Based on our estimates the Company’s adjusted EBITDA in 2019 is likely to reach an astonishing PLN 0.8 billion vs. PLN 0.3 billion recorded in 2018 and even despite such expected strong EBITDA performance the Company’s equities are still at a comparable price level as a year ago. While we do see the risks associated with margin deterioration of some the Company’s plastics and chemical products we remain positive on the Company’s agro segment. We are bearish on natural gas prices and seeing fertilizers at beneficial levels we estimate that PuÅ‚awy should be able to normalize its consolidated EBITDA next year at roughly PLN 580 million. Such an estimate brings the Company’s forwards P/E and EV/EBITDA multiples for 2020 to really undemanding levels of 6.1x and 1.4x, respectively.

We believe the gas market is an opportunity for the Company. We are getting increasingly bearish on natural gas prices and currently think a material rebound in gas prices in Europe is pretty improbable unless strong winter kicks in and the heating seasons proves demanding. But even in such circumstances, we think that any possible gas price rebound could prove to be only a temporal one. Based on the recent data from Gas Infrastructure Europe it can be estimated that the European gas inventories are at a higher level in a yoy comparison by an incredible 19% and that they are currently approaching historically unmatched levels of 97% of registered European storage capacity. All this is happening as a direct consequence of increasing LNG competition on global markets driven by a strong acceleration of LNG exports from the US. The LNG export terminals in the US should double their capacity this year and reach an annual export capacity of over 90 million cubic meters. While we think a considerable part of the new export capacity may be heading towards Europe, the exact destination of the exports may as well be of secondary importance. In our opinion, even if we were to assume that the majority of the LNG exports from the US will avoid Europe, this should still have an indirect negative impact on European gas prices by creating a structural cap on prices on the continent. Please recall that the shale revolution in the US already brought irreversible LT structural changes in the crude oil value chain. We strongly believe that the introduction of additional LNG trade should lower global LNG prices by creating stronger market competition in a similar fashion as it occurred a few years ago on global crude oil markets.

The coming quarters are likely to be supported by the agro business. We expect superb agro segment performance in the coming quarters thanks to the support of relatively low gas prices, good fertilizer demand, low fertilizer imports and limited supplies. We therefore continue to be bullish on the Company’s earnings outlook. We expect the Company’s consolidated EBITDA in 3Q19 and 4Q19 to amount to PLN 145 million and PLN 196 million, respectively. This, if our estimates are sound, could enable the Company to reach FY19 adjusted EBITDA of PLN 0.8 billion.

The performance of the chemical and plastics segment is a risk factor for 4Q19 and 2020 which softens our bullish attitude towards the equities. Given the deteriorating macro outlook in Western Europe and seeing the negative effects of the tariff war between the USA and China we believe that several products from the Company’s non-agro business could show weakening profitability in the coming quarters (caprolactam and melamine). The expected weak outlook on chemicals and plastics is perhaps the biggest risk factor we currently see in PuÅ‚awy and one that limits fundamental upside.