Petkim - 4Q11 results

Worst quarterly performance amid meltdown in product spreads

Bottom-line missed expectations on sizeable loss at the operating level. Despite the TL30mn one-off gain from the sale of Yarimca Land, Petkim posted TL40mn net loss in 4Q11, which fell significantly below the street expectation (+TL23mn) and even our TL6mn loss forecast, which was perhaps the most pessimistic house estimate. The negative surprise in 4Q11 was related to the sharper than expected impact of slippage in product prices and spreads on the operating margins. With the 4Q loss, 2011 bottom-line stood 22% short of 2010 figure in spite of a total TL115mn one-off gain booked during the year.

Margins turned negative under resilient feedstock price. Demand weakness in the global petchem market continued to lead to contraction in product prices during 4Q11 (i.e. LDPE, PP and Benzene prices were down 16%, 15% and 21% QoQ). Feedstock naphtha price, on the other hand, averaged ~10% lower QoQ. As a result, we estimate that the spreads in the corresponding products plunged 22%, 20% and 72%, respectively. We were expecting to see a negative EBITDA figure, but apparently the impact of the inventory losses on the profitability was worse than feared as the company’s TL63mn negative EBITDA figure was even larger than TL44mn negative EBITDA recorded in 4Q08. This figure was also far below our relatively bearish -TL5mn forecast and consensus average of +TL31mn.

Conclusion: Bottom-line weakness was already flagged by the company’s tax-purpose financials released in mid-February. But looking at consensus figures on Bloomberg, even the market’s curbed estimates remained overly optimistic (2011E mean net earnings forecast declined from around TL200mn at the beginning of the year to TL150mn levels following tax-purpose financials). Hence, Petkim is likely to experience some negative reaction today. This afternoon (at 2pm), the management will hold an analyst meeting, where we hope to get a better color on the outlook of the company. Hence, we opt to keep our neutral view unchanged with TL2.50/share target price for the time being.