EUR 850.00 For Business Accounts Only

Morningstar | K+S Expects Higher Profits in 2019; Maintaining Our EUR 17.50 FVE With Outlook Intact

In K+S' outlook for 2019, management issued EBITDA guidance of EUR 700 million to EUR 850 million, up from EUR 606 million in 2018. The company expects the increase to be driven by a combination of higher prices and higher potash volumes as the low-cost Bethune mine in Canada continues to ramp up. This is in line with our outlook for higher potash prices in 2019. With our long-term forecast largely unchanged, we maintain our EUR 17.50 per share fair value estimate and no-moat rating for K+S. The market reacted positively to K+S' outlook for higher potash profits, sending shares up over 9% on the day. At current prices, we view K+S as fairly valued on a risk-adjusted basis.

In the potash segment, K+S will continue to ramp up its low-cost Bethune mine. In 2019, we forecast the mine will produce around 1.8 million metric tons. By 2025, we think the mine should be able to deliver roughly 3 million metric tons as the second phase is complete. In its German operations, we think the recent production declines will begin to stabilize, as the company has built out storage capacity for its potash plant waste discharge. Over the last several years, K+S has had to reduce potash production because of waste discharge issues from lower river levels in Germany. By building its own waste storage capacity, the company's German potash production will depend less on river levels.

As K+S ramps up its new mine, we think the potash market will stay balanced. We forecast 2019 potash prices of $300 per metric ton on a China delivered basis. As new supply from EuroChem slowly ramps up, reduced production by SQM will be an offset. Our long-term potash price forecast of $310 per metric ton in nominal terms is also unchanged. Demand growth of 2%-3% per year will require higher-cost supply to remain on line despite capacity expansions from lower-cost existing producers.