Ciech – Na2CO3 as Defense Against COVID-19
The impact of the coronavirus crisis on the European soda ash market will be fairly limited in our view. When it comes to demand, a likely slump in orders from the auto industry, which accounts for about 10% of total sales at Ciech, is expected to be offset by higher orders from producers of glass containers and detergents, which, between them, consume nearly 40% of Europe's total soda ash supply. Accordingly, we expect that Ciech's revenue in FY2020 will remain unchanged from the year-ago level, with any potential declines in core business volumes likely to be mitigated by higher selling prices (we assume a 4% y/y hike in soda ash pricing in 2020, adding PLN 59m to the segmental top line), and savings facilitated by reduced market prices of natural gas (-39% y/y; +PLN 46m), coking coal (-9%; +PLN 35m), and emission permits (-7%; +PLN 6m). We do expect more significant negative effects of the epidemic on Ciech's resins business due to weaker demand, set to drop by a projected 15%, and we also see a 30% fall in orders for sodium silicate, resulting in respective year-on-year contraction of 38% and 36% in the FY2020 EBITDA results in the two segments. However the soda ash business will more than offset the declines with a projected rebound to PLN 632m from PLN 488m in 2019, driving the consolidated FY2020E EBITDA 17% higher to PLN 678m, followed by another 9% increase in 2021. Free cash flow will most likely be negative in 2020, but this will not stop a projected reduction in the net debt/EBITDA ratio to 2.4x at the end of the year from 2.6x a year earlier. After updating our models, we lower our target price for Ciech slightly to PLN 45.14 per share, and we maintain a buy rating for the stock.
Ciech is engaged in the production, trade and distribution of chemicals as well as comprehensive service activities directed at the domestic and foreign market. The main products sold by Co. are soda ash, TDI, plastics, resins, chemical fertilizers, plant protection chemicals, glass blocks and glass packaging, salt and other chemicals.
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