EUR 1100.00 For Business Accounts Only

Polish refiners IMO 2020 – a less bullish scenario

We resume our coverage of PKN Orlen with a HOLD recommendation as we believe the weaker earnings momentum is already discounted in the share price and some EV/EBITDA derating is warranted due to political risk. We resume our coverage of Grupa Lotos with a SELL as, in our opinion, the company’s multiples are demanding and consensus overestimates the impact of IMO 2020 and the start-up of the Delayed Coking Unit on the company’s EBITDA in 2020.
PKN Orlen: National multi-utility deserves a discount. PKN’s share price has dropped 24% in 1M due to the deterioration of both refining and petchem margins as well as the announcement of the tender offer for Energa. Following strong 9M19 results, we believe the earnings momentum for the coming quarters is less favourable. We forecast normalized EBITDA LIFO in 2020E to come in at PLN8.3bn, down 15% YoY. We expect IMO 2020 to have a negative impact on PKN’s refining margin, we also assume lower petchem margin. Based on our forecasts, PKN trades at 2020E and 2021E EV/EBITDA of 5x and 4.8x, respectively, at a 3% premium and 4% discount to peers (vs. historical 9% premium) and vs. the historical average 1YF EV/EBITDA of 5.4x. As we believe the weaker earnings momentum is already discounted in the share price, we resume our coverage with a HOLD recommendation and a fair value of PLN74/share.
Grupa Lotos: IMO 2020 and EFRA overrated. YTD Lotos’s share price is down 1%, largely in line with the WIG index. Lotos posted mixed 9M19 results (weak in Upstream, and decent but below our expectations in Downstream) and the market has been focused on speculation regarding the impact of IMO 2020 and the EFRA project, as well as the acquisition of Lotos by PKN. With 2020 EBITDA consensus of PLN4bn, we believe the impact of the Delayed Coking Unit, which is currently in the start-up phase is overestimated. We forecast the EFRA project to contribute a refining margin of US$2/bbl and EBITDA of PLN470m in 2020E. However, due to an assumption of lower HSFO and gasoline crack spreads, and just a mild improvement in the diesel crack, we forecast 2020E Downstream normalized EBITDA LIFO of PLN2.4bn, up just 4% YoY, and group EBITDA of PLN3.3bn, 18% below consensus. Based on our forecasts Lotos trades at 2020E EV/EBITDA of 5.2x , at a 12% premium to peers, which we do not find warranted. We resume our coverage with a SELL recommendation and Fair Value of PLN70.
Acquisition of 66% of Lotos by PKN. Taking into account the ongoing ‘stop the clock’ procedure, the EC’s deadline for publishing its decision regarding the merger is now 2Q20. Due to the EC’s comments regarding the wholesale market, we believe the deal seems likely to be either blocked or cleared with severe remedies, which would have a negative impact on results of the combined business. Therefore, we do not incorporate the acquisition into our forecasts.