MOL: A bond with multiple embedded options

MOL – Earnings Revision

Recommendation: Accumulate (unch.)

Target price (12-month): 3,400 (prev: HUF 3,587)

Current share price: HUF 2,832

 

A bond with multiple embedded options

 

• After the transfer of coverage we reiterate the Accumulate recommendation on MOL and assign a 12M ex-dividend target price of HUF 3,400 (prev: HUF 3,587). We hold the view that MOL has great investment opportunities (Polyol plant, Rijeka refinery upgrade vs. sell its INA stake) which once they turn to operation, MOL’s EBITDA could increase at least by ca. 10% on 2018. In the meantime investors could enjoy a 9% CAGR dividend increase (as a result of convergence to peers’ payout ratio and higher earnings), paying out cumulatively a maximum of 30% of its current market cap (ordinary + special dividends). Additionally, MOL has an embedded option related to the arbitration which could potentially add USD 0.5 – 1.0 billion compensation (HUF 190-380 per share cash).

 

• MOL equity story is similar to the characteristic of a bond with increasing coupons and with a few embedded options. Given MOL’s stable asset portfolio and its resilient business model (quarterly Clean EBITDA in USD terms and oil price has basically 0 correlation), coupled with the ongoing efficiency improvements on the refinery side, and the gradually growing DPS, investors could deem these characteristics similar to a bond. At the same time, MOL has couple of embedded options such as the positive effect of IMO 2020 or the above mentioned compensation from arbitration (HUF 190-380 per share cash).

 

• IMO 2020 will definitely be supportive to the refinery segment in an expected amount of ca. HUF 35 billion EBITDA, assuming (B/U spread of 2.5 USD and 17 USD/bbl diesel crack spread and -19 USD/bbl fuel oil crack spread), but we are of the view that this has largely been priced in. MOL trades, based our earnings estimates, at 4.7x EV/EBITDA ’19 and 4.3x EV/EBITDA ’20 multiples, 3% lower compared to its 5-year average valuation for 2019 and 6% below the 5-year avg. for 2020 forward EV / EBITDA, which is not yet compelling to us. However, if we deduct the potential compensation (Arbitration) from market capitalization, valuation numbers improve significantly by ca. 6 – 12%.

 

• One risk factor to our investment case is the non-normalization of the B/U spread, which could derail our EBITDA forecast by ca. 5-10% per year.

 

 

 

 

Gellert Gaál
Senior Equity Analyst

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
Phone:
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MEMBER OF THE CONCORDE GROUP

 

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