PETKIM (Company Update - HOLD (Downgraded),

Volatility is scary...

·      Downgrading to HOLD... We revised our target share price for Petkim to TL2.44 from TL2.58 on the back of poor 4Q11 earnings and revision in our risk free rate assumption to 9.5% from 10%. We cut our estimates for 2013 and onwards, while keeping 2012 almost flat. All in all, we believe that Petkim's valuation is stretched without a strong recovery in petrochemical demand and margins in a year of uncertainty about economic growth and oil prices.

·      Apart from the valuation, the loss booked in 4Q11 eliminated a strong dividend expectation which was believed to be a catalyst for the stock performance in the short term. Before the announcement of 2011 financials, we were estimating gross dividends to be TL150mn, while we now expect around TL50mn indicating a net dividend yield of only 2%.

·      Despite the strong growth potential in Turkey, Petkim is fragile to global developments... Petkim has a market share of 25% in Turkey, while rest of the demand is met by imports. Due to lower demand in EU in 2H11, Turkey was flooded with cheap imports from Middle East which were initially targeted for EU region. In addition, a lower EUR/US$ parity made EU exporters more competitive. All these factors led Petkim to wipe out what it had earned in 1H11 on the operational front. Rising oil prices also promotes competitiveness of low- cost ethane based producers in Middle East.

·      We expect 28% earnings growth for Petkim in 2012 based on a "moderate recovery" scenario in petrochemicals... Such a growth comes from moderate recovery in margins and base year effect. On the other hand, we estimate EBITDA to double in 2012 with the absence of inventory losses and a sharp fall in petrochemical prices.

·      We continue to expect gradual improvement in the profitability of Petkim towards the forecasted up cycle in 2015... In line with the path towards the peak, we forecast Petkim's EBITDA margin gradually improve reaching 12% in 2015, while the Management also expects double digit EBITDA margin at the peak of the cycle.

·      Risks... The major upside risk to our valuation is the upcoming container port investment which we currently do not include in our valuation. Completion of the financing of SOCAR refinery and SOCAR's support for Petkim shares on the ISE are other upside risks.

BGC Partners