Back to basics. Recommendation and investment thesis. Strengths and opportunities. Weaknesses and threats

Transcription

1 SQM-B Target price:clp 24,000 USD 43.9 Recommendation: Buy Risk: Medium Sector: Mining Update report Analyst: Juan Carlos Parra Stock market antecedents Price (CLP/share) 21,397 Price YtD 39.8% IPSA YtD 41.9% 52-week range 9,468-21,839 Sh. Outstanding (m) 263 Market cap (USDm) 10,313 ADR ratio 1 Av. Daily volume (USDm) 51.2 Shareholders: Calichera+PCS (32% each) 64.0% Free Float 36.0% Valuation 2009e 2010e EPS (CLP) P/E (x) EV / EBITDA (x) P/BV (x) Div. Yield (%) 1.9% 2.3% ROA 12.4% 13.7% ROE 23.0% 25.7% EVA 11.5% 14.0% Market price IPSA SQM-B Jan-08 Jul-08 Jan-09 Jul-09 Back to basics Recommendation and investment thesis September 30, 2009 SQM is developing an investment plan essential for the future of the company that involves an important change in Potash strategy. Traditionally, the main use of this product was as Potassium Nitrate raw material, whereas from now on, the focus will be the direct sales of this fertilizer. SQM expects to quintuplicate Potash sales within two years benefiting from high level prices. We have updated our SQM-B target price incorporating: Potash sales volume increase to 1.6 million tons annually in 2012 (186 th. in 2008); lower Potash prices expectations reducing long term estimates from 600 USD/ton to 530 USD/ton; higher reduction in volumes for this year in all business lines with the exception of Potash, and a slower than previously expected volumes recovery; 20% drop in Lithium and derivatives prices announced by the company; better solar salts sales perspectives for the upcoming years; an extension in the horizon for the target price, from the end of 2009 to the end of 2010; and a lower WACC, based on lower risk premiums. We are changing our recommendation to Buy with a CLP 24,000 per share target price by the end of The upside from current market price is 12.2% and total return, including dividend yield, is 15%. This upside exceeds the one expected for the IPSA in the same period (9.7%) generating the Buy recommendation. Strengths and opportunities Unusual product mix for a mining company along with different business lines which gives exposure to different markets and economic cycles. Geographic diversification allows 79% of sales as exports distributed in more than 100 clients. Unique natural resources along with low cost and flexible production processes give SQM significant advantages over its competitors and a quick strategy change option. High application potential for its products. New Lithium applications in electric powered vehicles batteries and industrial nitrates in solar power plants are opening new markets. Weaknesses and threats High exposure to Potash prices: this product not only drives Potash revenues but also Specialty Plant Nutrition and Industrial Chemical businesses revenues as it is used as raw material in those processes. Attractive new applications of its products could encourage the entry of new players in the market with potential effects in sales volumes and prices. Currency risk due to its exposure to different countries. A full version of this report in Spanish is available al or in Bloomberg with CORG <GO>

2 Operating Data Sales Volumes (th. tons) 2009e 2010e 2011e 2012e 2013e 2014e 2015e Specialty Plant Nutrition ,128 1,196 1,197 1,265 Iodine and Iodine derivatives Lithium and Lithium derivatives Industrial Chemicals Potassium Chloride (Potash) 550 1,104 1,353 1,614 1,635 1,796 1,939 1,407 2,076 2,566 3,054 3,145 3,309 3,523 Revenues (USD million) 2009e 2010e 2011e 2012e 2013e 2014e 2015e Specialty Plant Nutrition Iodine and Iodine derivatives Lithium and Lithium derivatives Industrial Chemicals Potassium Chloride (Potash) ,027 Other Commodity Fertilizer ,371 1,640 2,037 2,416 2,504 2,617 2,772 Costs (USD million) 2009e 2010e 2011e 2012e 2013e 2014e 2015e Specialty Plant Nutrition Iodine and Iodine derivatives Lithium and Lithium derivatives Industrial Chemicals Potassium Chloride (Potash) ,004-1,240-1,466-1,522-1,522-1,668 Prices (USD) 2009e 2010e 2011e 2012e 2013e 2014e 2015e Specialty Plant Nutrition Iodine and Iodine derivatives 26,229 26,229 26,229 26,229 26,229 26,229 26,229 Lithium and Lithium derivatives 5,833 4,667 4,667 4,667 4,667 4,667 4,667 Industrial Chemicals Potassium Chloride (Potash) Source: CorpResearch

3 Appendix: SQM Financial statements Income statement (USD millon) e 2010e 2011e 2012e 2013e 2014e 2015e Revenues 1,188 1,774 1,371 1,616 2,017 2,388 2,474 2,585 2,739 Costs (928) (1,142) (895) (1,082) (1,338) (1,581) (1,642) (1,578) (1,668) Operating income ,007 1,071 Ebitda ,097 1,158 1,243 1,335 Net financial expenses (11) (6) (24) (21) (18) (15) (11) (11) (4) Non operating result (27) (19) (45) (19) (13) (8) (2) (1) 7 Earnings before taxes Taxes; Min. Int.; Negative goodwill (52) (111) (88) (106) (137) (165) (171) (182) (195) Net income Cash flow statement (USD million) e 2010e 2011e 2012e 2013e 2014e 2015e Ebitda ,097 1,158 1,243 1,335 Capex (166) (276) (350) (350) (350) (264) (264) (264) (264) Taxes (49) (108) (83) (99) (128) (154) (160) (169) (182) Change in working capital (51) (246) 127 (59) (172) (159) (37) (48) (66) Free cash flow Net financial expenses (11) (6) (24) (21) (18) (15) (11) (11) (4) Debt amortization (62) (106) (221) (91) (86) (161) (6) (202) (6) Dividends net (95) (213) (300) (281) (305) (378) (420) (441) (471) New debt and other Financing activities Cash Flow Non operating Cash Floe (112) (394) (408) (554) (437) (654) (480) Total Cash Flow (20) (172) (136) (34) Final Cash Balance sheet (USD million) e 2010e 2011e 2012e 2013e 2014e 2015e Cash and equivalents Current assets 904 1,339 1,530 1,417 1,473 1,616 1,910 2,065 2,476 Fixed Assets 983 1,120 1,321 1,476 1,584 1,558 1,497 1,400 1,267 Total assets 1,986 2,567 2,962 3,015 3,193 3,327 3,577 3,654 3,952 Short term debt Current liabilities Long term debt Long term liabilities Equity 1,182 1,463 1,525 1,652 1,876 2,133 2,371 2,629 2,908 Total Liabilities 1,986 2,567 2,962 3,015 3,193 3,327 3,577 3,654 3,952 Source: CorpResearch

4 Glossary Term Definition / Translation Calculation EBITDA Earnings Before Interests, Taxes, Depreciation and Amortization Operational Income plus Depreciation and Amortization EBITDAR Earnings Before Interests, Taxes, Depreciation, Amortization and Rents Operational Income plus Depreciation and Amortization plus rent of fixed assets. It is used the at transport industries to reverse the rent of airplanes or ships. EV Enterprise Value Market capitalization plus Net Financial Debt plus EV/EBITDA Valuation multiple. While greater it is, more expensive it is the stock Minority Interest EV divided by Ebitda FCF Free Cash Flow Operational Income plus Depreciation and Amortization minus tax minus capital expenditures plus (minus) working capital variation. Free-float Percentage of stocks that can be freely traded in the market Percentage of stock that does not belong to controller s shareholders. Margin Operational Ebitda Net Percentage of sales Operational Income / Revenue Ebitda / Revenue Net Income / Revenue P/E Price / Earnings Market Price divided by EPS P/B Price to Book value ratio Market price divided by the accounting value of the stock. Dividend Yield The return in terms of dividends of investing in equities Dividends distributed in a year divided by the market price. FCF yield Free Cash Flow Return. FCF / Market Price ROA Return on Assets Net Income / Total Assets ROE Return on Equity Net Income / Accounting capitalization EPS Earnings Per Share Net Income / Shares outstanding YtD Year to Date Percentage variation year to date x Times Stocks recommendations: these are established according to the stock yield relative to the IPSA. We define a yield to be In line with the IPSA when it is within a range whose scope is equivalent to a third of the variation expected for the index, with a minimum of 5%. Once that is settled, we recommend Hold, when we expect the share to have a yield in line with the IPSA; Buy, when the yield expected for the share is above to that expected for the IPSA; and Sell, when the yield expected for the share is below to that expected for the IPSA.

5 CorpResearch Álvaro Donoso CorpResearch Director Economic Research Sebastián Cerda Economic Studies Director Juan José Donoso Economic Analyst Nicolas Birkner Economic Analyst Equities Research Cristina Acle Equities Research Director. Sectors: Forestry and Transport Matías Brodsky Analyst. Sectors: Foods, IT and telecom Juan Carlos Parra Analyst. Sectors: Energy and Mining Rosario Letelier Analyst. Sector: Energy Communications Antonia de la Maza Communications Editor Rosario Norte 660 Floor 17, Las Condes, Santiago, Chile. Telephone: (562) Bloomberg: CORG <GO>