PKN raised to HOLD, TP PLN 67.0 - Impact of lower fuel demand offset by oil price weakness
The lockdowns introduced in most CEE countries in mid-March resulted in a sharp decline of motor fuel consumption, especially gasoline, which saw a contraction of more than 30%, according to our estimates. At the same time, refining margins in the region were robust in 1Q and had even improved as of mid-March, being supported by weaker crude oil prices, a wider Brent-Ural spread and lower utilisation of refining capacities (which resulted in less supply). Moreover, the petchem margins have also turned out to be more resilient than expected, recovering from the depressed levels seen since last November through this January. Having well-diversified downstream operations (i.e. refining, petchem and fuel retail), PKN was able to sustain its earnings generation in 1Q 20e with all business segments being expected to post stronger clean LIFO earnings yoy (details on page 2). Although we project the 2Q 20e clean LIFO EBITDA to contract by almost 50% yoy mainly as a result of weaker demand for motor fuels, our FY 20e projection of clean earnings is only 12% lower yoy provided that motor fuel demand starts gradually recovering in 2H 20e. With GDP expected to strongly recover in 2021e, PKN stands to benefit in both refining and retail, hence we project a stronger yoy earnings contribution of both segments. All in all, we reckon that PKN is well equipped to overcome the challenging market conditions in 2020e and even close the two pending acquisitions of its domestic peer Lotos and the energy generator and distributor Energa. We set our new DCF-derived 12m target price at PLN 67.0 (PLN 70.0 prev.) and upgrade PKN to HOLD from REDUCE.Polski Koncern Naftowy Orlen's activities are divided into three main business segments: the Refining Segment that comprises crude oil processing as well as wholesale and retail trade in refinery products. The Petrochemical Segment that encompasses production and sale of petrochemicals and chemicals. The Retail Segment that comprises of sales at petrol stations. Co.'s basic products include gasolines, diesel oils, light heating oil, Jet fuel, liquid gas, polyetylene, polypropylene, benzene, butadiene, acetone, phenol, glycols, toluen, ortoxylene.
The Institutional Equity Research team of Raiffeisen Bank International AG covers 85 stocks from Austria, Central & Eastern Europe with sell-side research and thus levers our local broker status with excellent company relationships. For corporates in Austria, CEE and Western Europe, we offer co-sponsored research, which includes research coverage and marketing activities to investors. Additionally, through our Spotlight Research product we also shed light on leading European small and micro-caps, seeking greater visibility with investors.
The Institutional Equity Research team consists of roughly 15 analysts, both in Vienna and the CEE countries. Our analysts provide long-standing sector expertise in tandem with profound local market know how and a sectoral approach across the entire region.
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