Grupa Azoty – Cheap Gas Gives Fertile Ground To Grow Profits
Grupa Azoty’s earnings prospects for FY2020 are lifted by falling prices of natural gas in the EU market, where contracts for month-ahead deliveries have plunged 50% from the same period last year, and year-ahead contracts have been slashed 30%. This means that EU gas is currently the cheapest in the world, giving local fertilizer producers a cost advantage over global competition. What is more, at the current levels, low-cost gas feedstock indicates an 11% rebound in margins on urea production, and 51% expansion in margins on ammonium nitrate. The coronavirus outbreak is also helping to relieve competitive pressures on European fertilizer producers because it has forced China, the world’s largest supplier of ammonia, urea, and multi-nutrient fertilizers, to curb economic activity. With fresh capital of PLN 210m raised by its GA Police unit, Grupa Azoty’s net debt/EBITDA ratio not counting the PDH project is not likely to exceed 1.5x in the next two years (versus a covenant leverage ratio of 3.5x). In the short term, we would look out for a positive surprise from Grupa Azoty in the 2019 Q4 reporting season. We maintain a buy rating for ATT (after an upgrade to hold on February 5th), and we keep the target price unchanged at PLN 30.31.
Grupa Azoty is engaged in the processing of nitrogen products, the production and sales of fertilizers, the production and sales of plastics, the production and sales of oxo alcohols, the production and sales of titanium dioxide, the production and sales of melamine, the extracting and sulphur products processing, and the extracting of phosphate rock. Co. and its subsidiaries have five operating segments: Fertilizers-Agro; Plastics; Chemical; Energy, includes activities that concern production of electricity and heat; and Other Activities, which comprises other operations, such as laboratory services, rental of properties and other activities that cannot be allocated to other segments.
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