PhosAgro - Seasonally Strong 3Q20 Trading Update; Earnings Preview

PhosAgro today released a strong 3Q20 trading update, with seasonally high sales to its premium markets in Europe and Russia. We expect EBITDA to surge 12% Q-o-Q to $315 mln in 3Q20, while FCF should be strong at around $200 mln for a 4% yield thanks to a working capital release. We reiterate our financial forecasts for this year, including EBITDA of $1.16 bln, 5% above the current Bloomberg consensus. At spot fertilizer prices and the current USD/RUB, PhosAgro is trading at attractive 2021E EV/EBITDA of 4.8, a FCF yield of 10-12% and a yield on the dividends to be paid next year of 10%.> Phosphate fertilizer production was flat y-o-y in 3Q20 at 1.9 mln tonnes, while nitrogen-based fertilizer output climbed 6% y-o-y to 0.56 mln tonnes, bringing total production up 1.7% y-o-y to 2.5 mln tonnes. In 9m20, fertilizer production totaled 7.5 mln tonnes, and we consider PhosAgro to be on track to meet its full-year guidance of 10 mln tonnes.> Fertilizer sales were strong, with phosphate fertilizer volumes jumping 15% y-o-y to 2.25 mln tonnes in 3Q20. Total fertilizer sales came in 10% y-o-y higher at 2.7 mln tonnes. Sales to premium markets increased seasonally, with phosphate fertilizer sales jumping 64% Q-o-Q to 0.87 mln tonnes in Russia and 33% Q-o-Q to 0.48 mln tonnes in Europe. In Russia, PhosAgro usually receives prepayments for its sales, so this change in geographical structure could have reduced working capital in 3Q20.> We expect EBITDA to climb 12% Q-o-Q to $315 mln in 3Q20, while FCF should be strong at $200 mln for a 4% yield thanks to the working capital release. The dividend for 3Q20 will be based on the higher of 50% of adjusted net income or 50% of FCF. We calculate that adjusted net income was close to the FCF figure in 3Q20, i.e. around $200 mln. We expect a dividend of $100 mln for a 2% yield, but we note that PhosAgro often pays a higher dividend than stipulated in its policy when market conditions are good.> The DAP price has surged 13% over the past 10 weeks to $355/tonne FOB Tampa thanks to strong seasonal demand in India and the proposed introduction of US import tariffs on Russian and Moroccan product (with a preliminary decision to come in November). Indian demand should now slow until March due to seasonal factors, so prices are likely to stabilize through the year-end. Despite strong pricing, we expect 4Q20 to be weakish for PhosAgro due to a seasonal slump in sales volumes, and we expect an inventory buildup and negative FCF. > We reiterate our financial forecasts for this year and project EBITDA of $280-290 mln for 4Q20, which would be down in Q-o-Q terms but still up more than 50% y-o-y thanks to firm prices and the weak ruble. This would bring full-year EBITDA to $1.16 bln, 5% above the current Bloomberg consensus. At spot fertilizer prices and the current USD/RUB, PhosAgro is trading at a relatively cheap 2021E EV/EBITDA of 4.8, a FCF yield of 10-12% and a yield on the dividends to be paid next year of 10%.