RESEARCH January 30, 2013

Transcription

1 RESEARCH January 30, 2013 Nizhnekamskneftekhim On the eve of a «Big Jump» This is an update to our financial model of NKNH and reestimation of the company s fair value as IAS report for 3Q and 9M of 2012 came out. Our estimation based on DCF (Discounted Cash Flow) method as of the end of 2013 provides for a fair price of NKNH shares at 1.34 USD per common share, and 1.15 USD per preferred share. Estimation gives us a 30.1% and 30.7% growth potential vs the current quotes respectively and recommendation BUY. Despite the net profit drop, we have a positive outlook on operation and financial results of the company. Under the conditions of natural rubber average price dropping more than 30% down vs price average within 9M 2011 (note: about half of the company s sales comes from natural rubber), NKNH managed to keep its gross profitability at a relatively high level at the expense of controlling costs. Other operation costs within 1H 2012 grew by bn RUR and made a significant negative impact on 9M financial results, however, we take that as a temporary occurrence, which gets confirmed by the results of 3Q As the prices of natural rubber stabilize and even climb slightly upwards in 4Q 2012, we expect a much less drop of the net profit in 4Q 2012 vs the similar period of 2011, and less than a 14.4% drop in 3Q Consequently, according to the conservative estimation, we expect the annual net profit to drop 2.5% in rubles and 1.3% in US dollars. We assume that despite the coming large spending related to beginning of ethylene complex construction, the company continues sharing with its holders by directing 30% of the annual profit to dividends. As a result, the 2012 dividends might form about 2.26 RUR per share, which means dividend yield of the preferred shares to be approximately 8.6% versus the current quotes. Our model provides for continuing mild increase of production volumes we take growth of the actual volume of production for 2013 as 4%. This year we expect average annual selling price of natural rubber to grow 17.5%. Resulting from that, our 2013 targets provide for company s sales up by 13.6% to bn USD, EBITDA 12.1% to 785 mn USD and net profit 10.7% to 508 mn USD. Prices of artificial rubber began recovering cautiously, and that has a positive impact on the financial results of the company as soon as in 1Q Despite European economy being weak (about 80% of rubber output by company is exported to Europe), growth rates recovery in China and acceleration of growth in the United States leave us hoping for sustainable nature of the price recovery process. Considering a 1- to 2-month lag in export prices versus the market price, growth potential of rubber selling price is taken to be approximately 20% in early % 160% 140% 120% 100% Target: $1,34 (+30,1%), BUY Analyst: Vasilii Tanurkov VTanurkov@veles-capital.ru NKNC and RTS Index 80% RTS Index NKNC NKNCP Company profile Information on Nizhnekamskneftekhim Bloomberg Tiker NKNC Common Stock Price, USD 1,03 Preffered Stock Price, USD 0,88 52W Low/High, Common Stock, USD 0,78 / 1,10 52W Low/High, Preffered Stock, USD 0,56 / 0,85 Target Price (cs), USD 1,34 Target Price (ps), USD 1,15 Upside potential (cs), % 30,1 Upside potential (ps), % 30,7 Shares Outstanding (cs), mln units Shares Outstanding (ps), mln units MC EPS 2012, USD 0,28 EV, mln USD Dynamics of financials 2012E 2013E 2014E Sales, mln USD EBITDA, млн USD Net Income, mln USD EPS, USD 0,28 0,32 0,33 EBITDA margin, % 16,6 16,4 15,9 Net Income margin, % 10,9 10,6 10,7 EV / S 0,45 0,40 0,38 EV / EBITDA 2,71 2,42 2,38 P / E 3,63 3,28 3,11 ROIC, % 28,4 33,1 23,5 ROE, % 23,1 21,8 19,7 NKNC Sales segmentation 27,3% 25,0% 47,7% Rubber Plastics Other January 30, 2013 Page 1

2 As comes from 9M results, end-product output volume increased 3.6% up to mn tons; rubbers output grew 6.1% to 437 th tons; plastics output grew 2.1% to 455 th tons. Output volumes grew due to execution of the development programs on modernizing and building up capacity, increase of internal processing of monomers and semi-finished products, rational load of production capacities. In 2012, the company launched a unit, producing ABS-resin, with a capacity of 60 th tons per year; completed a number of projects on building up rubber output capacity. In 2013, the company plans to launch a styrene resin production unit with capacity of 50 th tons, which lets the company build up production in the plastics segment by another 8%. In 2013, NKNH starts executing its seminal project of constructing a complex of ethylene production with a capacity of 1 mn tons per year. Aside ethylene production announced earlier, there also is a plan of constructing capacities producing 600 th tons of polyethylene and 400 th tons of polypropylene. Assumingly, three given facilities are to be put in commission in Construction cost of the given complex is estimated around 3 bn USD, which means investment spending grows significantly within the coming three years. Due to these reasons, Free Cash Flow of NKNH enters the negative zone for three coming years. Despite that, we expect the company to stick to its policy of stable dividend payments as the construction will mainly be financed by credit money. Introduction of given complex allows the company to nearly triple its production volume of plastics. That radically diversifies the product line and significantly cuts the share of rubbers in company s volume of production. The Russian market of plastics, polyethylene in particular, shows very high growth rates. In Russia, consumption of plastics per capita lags from European figures manifold, which provides for high growth potential of the market in long-term prospect. Meanwhile, deficit of plastics at the domestic market is frequently experienced under current conditions, which resulted in prices of plastic in Russia being higher than they are in Europe % 50% 40% 30% 20% 10% -20% Rubber price dynamics Natural rubber, China, USD/t Synthetic rubber, Thailand, USD/t Synthetic rubber, Japan, USD/t Natural rubber premium 0% -10% Natural rubber premium, % Exporting price dynamics Exporting price, USD/t Market price, USD/t January 30, 2013 Page 2

3 Nizhnekamskneftekhim financial model, mln USD E 2013E 2014E E 2013E 2014E Income Statement WACC Sales Risk-free rate, % 5,3 5,1 5,2 Operational Expense (less D&A) Income tax rate, % 20,0 20,0 20,0 EBITDA Cost of equity (cs), % 15,5 15,6 15,7 D&A Market risk, % 5,0 5,0 5,0 EBIT Beta leveraged 0,9 1,0 1,0 Nonrecurring issues Specific risk, % 5,6 5,6 5,6 Interest Expense Cost of debt, % 9,6 9,4 9,5 Nonoperational Income/Expense Specific risk, % 4,3 4,3 4,4 Pretax Income Cost of equity (ps), % 13,9 13,7 13,8 Income Tax Expense WACC, % 14,7 15,0 14,5 Minority Interest Net Income Free Cash Flow NOPAT Balance Sheet D&A Lon Term Assets CAPEX PPE and Intangible Net Change in Working Capital Other LTA Free Cash Flow Current Assets WACC, % 15,0 14,5 Receivables, Inventories and Other CA Discount factor 0,87 0,76 Short Term Investments Discounted free cash flow Cash and Equivalents Total Assets Common stock valuation Equity TGR, % 3,0 Shareholders Equity Discount cash flow sum (+) Minority Interest Discounted terminal value (+) Long Term Liabilities EV Long Term Debt Net debt (-) 158 Other Minority interest (-) 38 Current Liabilities Financial investments (+) 81 Short Term Debt MC Payables Fair value of common stock, USD 1,34 Total Liabilities and Equity Sensibility of the common stock valuation, % Cash Flow Statement TGR 1,5 2,0 2,5 3,0 3,5 4,0 4,5 Operating Activity WACC Net Income , D&A , Net Change in Working Capital curr Other , Investment Activity , CAPEX Investments in Subsidiary Cash Flow for preffered stocks Other Dividends Flow Financial Activity Discount rate, % 13,9 13,7 13,8 Net Change in Debt Discount factor 0,88 0,77 0,68 Net Change in Equity Discounted dividends Dividends Other Оценка стоимости привилегированных акций Effect of exchange rate changes TGR, % 3,0 Net change in cash and cash equivalents Discount cash flow sum (+) 115 Discounted terminal value (+) 137 Ratios 14,1 16,7 16,6 16,4 15,9 Preffered stocks fair value 252 EBITDA Margin, % 7,3 10,8 10,9 10,6 10,7 Fair value of preffered stock, USD 1,15 Net Margin, % 10,4 23,3 56,9 58,0 22,8 EBITDA / interest expense, 1х 3,1 6,3 8,1 15,9 15,3 Sensibility of the preffered stock valuation, % Investments / Sales, % 20,6 27,6 23,1 21,8 19,7 TGR 1,5 2,0 2,5 3,0 3,5 4,0 4,5 ROE, % 24,3 37,9 28,4 33,1 23,5 Rate ROIC, % 1,0 0,5 0,3 0,7 0,7 2, Debt / EBITDA 0,8 0,2 (0,3) 0,1 н/с 1, Net Debt / EBITDA 0,4 0,2 0,1 0,2 0,2 curr Debt / Equity 0,14 0,29 0,28 0,32 0,33-1, , Market multiples EV / Sales 0,6 0,4 0,4 0,4 0,4 EV / EBITDA 4,2 2,6 2,7 2,4 2,4 EV / EBIT 5,3 3,0 3,1 2,8 2,6 P / E 7,2 3,6 3,6 3,3 3,1 P / BV 1,5 1,0 0,9 0,7 0,6 EV / FCF 9,2 5,1 5,5 - - Source: company, estimates: Veles Capital January 30, 2013 Page 3

4 Information disclosure The statement of an analyst and confirmation of the responsibility withdrawal The given report is prepared by the analyst (-s) of the Investment Company Veles Capital. The given estimations in the present report reflect personal opinion of the analyst (-s). The award of the analysts does not depend, never depended and will not depend upon the specific recommendations or estimations, provided in the present report. The award of the analysts depends upon the general efficiency of the business of the Investment Company Veles Capital, determined by the investment benefit of the company s clients and also upon the incomes from other types of activity of the Investment Company Veles Capital. The given report, prepared by the Research Department of the Investment Company Veles Capital, is basing on the public information. The present review was prepared independently from other Departments of the Investment Company Veles Capital, and any recommendations and judgments, presented in the given report reflect only the view point of the analyst (-s), participated in making of the present review. Due to that consideration, the Investment Company Veles Capital considers being necessary to state that the analysts and the Company are not responsible for the content of the given report. The analysts of the Investment Company Veles Capital do not take overall responsibility to regularly up-date the information, contained in the present report, and also to announce about all changes, introduced to the present review. Provided analytical material of the Investment Company Veles Capital could be used only with information aims. The company does not guarantee the completeness and preciousness of provided information in the given report and its reliability, and also is not responsible for direct and indirect losses from using of the given materials. This document cannot serve as a basis for purchase and selling any securities, and cannot also be considered as an offer from the part of the Investment Company Veles Capital. The Investment Company Veles Capital and (or) its subsidiaries along with the staff, directors and analysts of the Investment Company Veles Capital have the right to purchase and sell any securities, mentioned in the given review. The Investment Company Veles Capital and (or) its subsidiaries can serve as a market-maker or have the liabilities for underwriting of companies securities, mentioned in the given review, can purchase or sell them for clients, and also make any actions, which do not contradict the Russian law. The Investment Company Veles Capital and (or) its subsidiaries can also be interested in the possibility of providing the companies, mentioned in the present review, with the investments and bank or any other services. All rights for the given bulletin belong to the Investment Company Veles Capital. The reproduction and/or distribution of the analytical materials of the Investment Company Veles Capital are prohibited without the written permission of the Company. Veles Capital The principle of recommendation assignment The investment recommendations are given based on the evaluation of the company s share yield. The basis for the calculation of the expected company s cost is the evaluation by the discounted cash flows method (DCF). In some estimations the method of comparable coefficients, and also the mixed estimation (by DCF method and by comparable coefficients method) are applied. All recommendations are assigned based on the determined by us the fair cost of the shares within the nearest 12 months. At the present moment the investment scale of the Investment Company Veles Capital is the following: BUY corresponds to the growth potential of the shares within the nearest 12 months by 15% or more. ACCUMULATE corresponds to the growth potential of the shares within the nearest 12 months for 5-15%. HOLD corresponds to the growth (reduction) potential of the shares within the nearest 12 months from -5% to 5%. REDUCE corresponds to the reduction potential of the shares within the nearest 12 months from 15% to 5%. SELL corresponds to the reduction potential of the shares within the nearest 12 months by 15% or more. In some cases the deviations from the evaluation scale given above, based on which the recommendations are assigned, are possible. That fact relates to the high volatility of some securities in particular, and market in the whole, and also to the individual characteristics of one or another issuer. In order to get additional information and specifications please contact the Research Department of the Investment Company Veles Capital. January 30, 2013 Page 4

5 Fixed Income Sales Department Evgeni Shilenkov Head of Trade Department Ekaterina Pisarenko Oksana Telichko Vice-head of Department Anton Pavlyuchuk Head of Bonds Department Alena Shemetova Vice-head of Bond Department Oksana Stepanova Vice-head of Bond Department Elena Rukinova Bonds Trader Murad Sultanov Eurobonds Trader Mikhail Mamonov Head of Bills Department Olga Bogolubova Uliya Shabalina Taras Kovalchuk Equity Sales Department Alexander Antipov Alexey Nikogosov Dmitry Peregudov Anna Shebeko International Sales Vyacheslav Bezzubenko Research Department Ivan Manaenko Airat Khalikov Metals and Mining, Machinery Vasiliy Tanurkov Oil and Gas, Chemicals and Fertilizers Yury Kravchenko Banking, Money Market Anna Soboleva Debt Markets Russia, Moscow, , Krasnopresnenskaya nab. 12, Entr. 7, floor 18 Tel.: 7 (495) , Fax: 7 (495) Ukraine, Kiev, 01025, B. Zhhitomirskaya, 20 Tel.: 38 (044) Fax: 38 (044) January 30, 2013 Page 5