EUR 850.00 For Business Accounts Only

Morningstar | K+S Reports Solid First Quarter; Raising Fair Value Estimate to EUR 18 on Higher Near-Term Outlook. See Updated Analyst Note from 15 May 2019

K+S began 2019 on a positive note as total EBITDA grew 14% year on year to EUR 270 million driven primarily by higher potash prices. Management maintained 2019 annual EBITDA guidance of a range of EUR 700 million to EUR 850 million. We have slightly raised our near-term outlook for K+S to account for higher deicing salt prices. Having updated our model to reflect these changes, we raise our fair value estimate for K+S to EUR 18 per share from EUR 17.50. Our no-moat rating is unchanged. At current prices, we view K+S as fairly valued, with shares trading just below our fair value estimate.

In 2019, K+S switched to a new segment reporting structure, where segments are organized by consumer group. In the agriculture segment, which sells potash and specialty fertilizers, EBITDA grew 31% year on year as higher potash prices were partially offset by higher unit production costs and lower volumes. We maintain our long-term potash price forecast of around $300 per metric ton (on a China delivered basis) as new supply grows in line with demand. As the low-cost Bethune potash mine continues to ramp up production, we see EBITDA margins growing into the mid-20% range from the 16% generated in 2018. For K+S, the agriculture segment will be the company's most important as we forecast the segment to generate over half of total company profits this year and going forward.

In the communities segment, which sells deicing salt primarily to governments in North America and Europe, EBITDA grew 63% year on year to EUR 16.4 million as a result of higher prices. During its earnings call, management said it expects favorable market dynamics in the upcoming North American highway deicing salt bid season, which typically runs from April to September and will set prices for October 2019 through September 2020. We share management's view and expect K+S to be able to raise prices during the bid season. As a result, we have increased our near-term price forecast for the communities segment.

Deicing salt prices generally rise following winters with above average snowfall, as companies carry less inventory and can submit bids that reflect the marginal cost of production in a given region. However, deicing salt prices typically fall following winters with below average snowfall, as deicing salt producers carry more inventory and will reduce prices to increase volumes. The 2018-19 winter saw above average snowfall. As a result, we expect K+S will benefit from higher prices.

For more information on our outlook for winter weather and deicing salt prices, see our April 25 report, "Compass Minerals' Rally Isn't Over; We Still See 40% Upside."