Grupa Azoty - Headwinds from Weak Fertilizer Prospects
Grupa Azoty’s business environment at the moment is being undercut by high prices of natural gas, which have already overtaken other world benchmarks, driven by depleted EU reserves as the region enters a spell of freezing weather. Adding to the pressure is an increasing global fertilizer supply, led by China, which markedly boosted its exports in the second half of 2020; as a consequence fertilizer markets have been trading low even as grain markets continue to rally. After likely contraction in margins on sales of nitrogen fertilizer in the seasonally-crucial first quarter, we currently expect Grupa Azoty to suffer a 33% fall in its FY2021 EBITDA to a projected PLN 520m. When it comes to longer-term prospects, a great challenge faced by Grupa Azoty in the coming years is the “green shift” taking place in the ammonia industry, evidenced by plans for two zero-carbon ammonia facilities in Europe. The Polish company, which pays hundreds of millions a year for emission allowances, so far has not come out with an ambition to reduce its carbon footprint (and costs). Moving on to polypropylene, at the end of 2020 the benchmark margin on propane-based PP fell to its lowest level since 2017 at $300/t. If market conditions do not shift by the time the PDH complex, which is financed with debt, is ready in 2023, this will put into question its economic viability. After updating our financial outlook for FY2021 and 2022, we lower our target price for ATT from PLN 24.54 to PLN 23.65 per share and we downgrade the Company from hold to sell.
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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