EUR 900.00 For Business Accounts Only

Ciech - Back in good graces - BUY PLN 56.40 IPOPEMA

Back in good graces
We initiate coverage of Ciech with a BUY recommendation and fair value of
PLN 56.4 per share, which implies 19% upside potential.
The rationale behind our positive view on Ciech is based on our current
positive outlook on the European soda ash market, which we believe has
already digested the uncertainty related to global oversupply due to low-cost
production in Turkey. Ciech’s investment in evaporated salts in Strassfurt and
its acquisition of Proplan, expanding its organic segment, should enable Ciech
to achieve higher margins, which, coupled with strong EUR/PLN and USD/RON
rates, we view as positive drivers going forward. In our base case scenario,
Ciech should be able to pay sustainable dividends with approximately a 5%
dividend yield in the coming years (PLN 2.8 DPS 2019E).
Turkish problem losing significance
We assume that the risk related to the additional production capacity coming from
Turkey and other producers has been already neutralized by a number of factors: (1)
robust demand in the soda ash market; (2) uncertainty regarding the quality and
timely delivery of soda ash from the Kazan plant (34% increase in impurities y/y); (3)
annual soda ash contracts for 2019E showing a $10 per ton price increase; (4)
potential oversupply eliminated other investments in 2-3 years horizon. Therefore, in
2019E we expect Ciech to introduce a 6% y/y increase in its soda ash price.
Greener economy = robust demand
The majority of newly produced Turkish soda ash is headed for markets outside
Europe, which is clearly positive for Ciech. The recent supply from Turkey is being
absorbed by the Chinese market and we expect this trend to continue thanks to
capacity shut-downs in China due to the ongoing "war on pollution". In Poland, we
expect domestic demand to be spurred by the completion of two glassworks by the
end of 4Q19 (approx. 10% increase in Polish demand).