WOOD Flash – Ciech: 3Q16 results – slight beat, but outlook remains sluggish

Ciech reported its 3Q16 results yesterday (14 November). The results were broadly in line with the consensus, with the adjusted EBITDA beating the consensus by 5%. Although the overall results beat the consensus, the EBITDA in the most important segment, soda ash, came in at PLN 200m, -4% qoq despite the higher volumes from the new production line. This was chiefly the result of further price pressure, due to the weak environment in the Chinese soda market. However, on the positive side, the 3Q16 soda ash segment results were supported by a further unit production cost decline, in our view. The company expects that the soda ash price may be slightly lower in 2017E than in 2016E (we assume 1% growth), but volumes should be higher (we assume flat production yoy). Ciech is also cautious on the increasing coke and coal prices, which may hurt margins in 2017E (we had assumed just 1% yoy growth in coal prices in 2017E, but we have not yet priced in the 7% drop in the coal price seen so far in 2016E, as we had assumed only a 2% drop).
Ciech is still aiming to develop the organic segment, also through M&A, despite the failed attempt to acquire SAPEC (the withdrawal from which was announced on 8 November). Overall, we see the 3Q16 results as slightly positive, but they do show that the soda ash market is weakening, in our view. Moreover, Ciech’s guidance for 2017E and the growing coal price also do not give much cause for optimism, in our view. We still believe Ciech looks cheap, trading at our 2016E EV/EBITDA of 5.6x and the consensus multiple of 5.5x, in line with Soda Sanayii, but far below its other peers.