PETKIM(Company Update - BUY Upgraded)

Long term story should start to be priced in…

·         Upgraded to BUY… We revised up our target share price for Petkim by 26% due to: i) the decline in our risk free rate assumption to 8.5% from 9% and our cost of debt assumption to 9.5% from 10%, ii) the promising decline in net debt position from TL240mn to TL90mn parallel to lower working capital requirement, iii) our new FX rate assumptions, iv) slightly more positive view on longer term operational performance. Our target share price stands at TL2.46 pointing to an upside potential of 18%. Despite the lack of sizeable upside potential, we upgraded Petkim to BUY believing that the long term growth story should start to be priced in. Our call is rather based on the long term growth prospects of Petkim but it is worth to note that the short term profitability may be vulnerable to volatility in petrochemical margins.

·         Long-term projects will crystallize value… We estimate that addition of Petkim-APM container port project, Petkojen and STAR Refinery projects leads to an upward revision to our base case target price by 13%, 32% and 64%, respectively. Note that, SOCAR will be the investor in Petkojen and the refinery projects, while Petkim will reap some benefits.

·         Upcoming projects are expected to reduce the volatility of the business leading to a sustainable EBITDA margin of 11% in the long term… Our base case scenario incorporates a gradual improvement in EBITDA margin to 9.8% until 2015 in line with the up cycle in petrochemicals, followed by a gradual deterioration starting from 2016. However, with the addition of container terminal, Petkojen and the refinery project in our valuation, Petkim can maintain a sustainable EBITDA margin of 11% despite the down cycle. We expect an annual EBITDA contribution of around US$135mn from these projects starting from 2017.

·         Strong shareholder with a committed investment programme… SOCAR plans to invest around US$15bn in Turkey until 2023. STAR Refinery, TANAP and electricity generation investments are the major projects. SOCAR will utilize Petkim’s 19mn sqm land which is ideally suited for large industrial investments on the Aegean coast.

·         Risks… Since we do not include any of the potential projects in our valuation, downside risk is rather limited with petrochemical cycle. We will revise up our valuation, as soon as further steps are taken regarding with the above mentioned projects.

 

BGC Partners