PhosAgro - Tailwinds Ahead

Phosphate markets have rallied strongly at the beginning of this year, thanks to rising soft commodity prices. Given the lack of excess inventories, no new capacity coming online and the approach of the high season, we expect DAP prices to continue climbing, and we raise our projected average for FOB Tampa to $435/tonne for 2021. This should ensure record EBITDA of $1.5 bln for PhosAgro and a dividend yield of 10%. We lift our target price to $18.90 per GDR and upgrade our recommendation to BUY.> A recent USDA report indicated a much tighter supply/demand balance across soft commodities (corn in particular) due to weaker production amid poor weather in the US and South America. This has pushed soft commodity prices to record levels, boosting fertilizer affordability and encouraging farmers to expand arable land and fertilizer application this year. Global phosphate demand grew around 3% y-o-y last year, above the five-year CAGR, and we expect strong demand yet again this year. With phosphate producers sold out until mid-March, no excess inventories and no major new capacity additions in the pipeline, we expect DAP prices to climb above the spot FOB Tampa price of $450/tonne in the short term, averaging $435/tonne in 2021, 35% above the 2020 average. > Top-line growth and the stubbornly weak ruble should boost PhosAgro's EBITDA margin and offset mining inflation pressures. At the prevailing USD/RUB rate of 75 and spot fertilizer prices, we estimate EBITDA at $1.7 bln (up 45% y-o-y), or $1.5 bln at our base-case fertilizer prices (slightly below spot) and if we plug in our macro team's USD/RUB forecast of 68.3. The Bloomberg consensus forecast for 2021 EBITDA is slowly picking up but still stands at just $1.2 bln, 32% below the level implied by spot prices and 22% below our estimate, indicating a slew of upgrades to come. > Last year, the company exhibited good discipline in terms of capex guidance (with no increases for the first time in several years). It also optimized its working capital, which was supportive for healthy EBITDA-to-FCF conversion. It is on track to boost its phosphate rock output and raise its rock-to-fertilizer conversion rate from 70% to 80% over the next five years. We estimate 2021 capex at $600 mln in total (i.e. including capitalized repairs reported in FCF). Hence, we estimate 2021 FCF at $640 mln, or an 11% yield.> Given the company's track record of paying dividends above its policy (we estimate it paid 25% higher dividends for 9m20 than stipulated by the policy), we expect the dividend to be paid for 2021 to yield around 10%. > Following years of trading in a narrow range of $12-14 per GDR, the stock has climbed above $15 per GDR this month. Nevertheless, it is still trading at a steep discount to Mosaic, its closest global peer, at a 2021E EV/EBITDA of 5.1 (our base case) versus the Bloomberg consensus of 7.3 for Mosaic, which we regard as unjustified. Using a target EV/EBITDA of 6.0, we raise our target price from $13.60 to $18.90 per GDR and upgrade our recommendation to BUY.