TeraPlast: Leaner, stronger, and with a large cash pile (stays BUY)

Since our initiation on TeraPlast, its share price has increased by 56.4%, and the company has announced the sale of its steel business, which accounted for nearly half of its EBITDA in 2019. We have increased our forecasts and maintain our BUY rating on TeraPlast, with a higher price target (PT) of RON 0.462/share, implying 22.2% upside. Following the successful closing of the sale of its steel business, which we estimate to happen in 4Q20E, we expect TeraPlast to be in a net cash position, strengthening its balance sheet, following a period of leverage being around 2.1-2.9x in the past few years. At the end of 2020E, we expect a net cash position of RON 227m, equivalent to 34% of its current market cap, which would leave room for high dividend payouts, as well as investments and acquisitions. We believe the focus on plastics from 2021E-onwards is positive, given the company’s exposure to infrastructure projects, which should continue growing at a fast pace in Romania, despite the uncertainty in the overall construction market. Currently, TeraPlast is trading close to its three-year average multiples, at a LTM P/E of 12.5x and an EV/EBITDA of 8.1x, while the discounts vs. its peers have narrowed somewhat, to 7.5% on our 2021E P/E of 16.3x. However, we believe there are reasons to justify a further rerating.