PETKM - Company Update: Cost Savings Factored In

TURKEY - PETKM - Company Update: Cost Savings Factored In

With this report, we incorporate potential cost savings for Petkim due to i) naphtha imports from Iraq (US$25mn) as of 2013; and ii) SOCAR’s power plant (US$25mn) as of 2015, into our valuation model. We also align our assumption of contributions from SOCAR refinery with the management guidance, raising our forecast by US$25mn to US$100mn by 2017. Petkim shares have gained 50% in value over the last 4-month period (in US$ terms) and outperformed the MSCI Europe Chemicals Index by 31% (also the ISE-100 by 32%). Despite having revised our target price from TRL2.50 up to TRL3.24 per share, we attach HOLD (L/T) and MARKETPERFORM (S/T) ratings to the stock, given the limited upside potential left following the recent upswing.   

Substantial 2013E EBITDA growth… Following the 90% yoy fall in 2012 to US$7mn due to weak petrochemical margins, we expect the EBITDA to grow to US$148mn in 2013 on higher product margins, volume growth, as well as cost savings from naphtha imports from Iraq and natural gas supply from SOCAR.

Near term multiples not attractive… Petkim shares trade at 11.7x EV/EBITDA and 21.7x P/E on our 2013 estimates, well above respective global peer averages of 7.1x and 11.1x.

Major risks… Given that 58% of our target price is derived from potential cost savings out of new projects, execution risk is the key pitfall, in our view. Higher/lower-than-expected cost savings from the projects; stronger/weaker-than-expected product margins; and the pace of demand recovery in Europe and China are other significant risk factors.   

Petkim Petrokimya (PETKM.IS) Report

Source of opportunity

 

We reiterate our Sell rating on Petkim with a new price target of TRY1.50 (from TRY1.63) due to our lower estimates following the 2Q results and updating our timeline for its new projects after some delays. While Petkim is trying to implement several projects to improve its efficiency, and the new STAR refinery (due in 2016) is likely to contribute synergies, we expect its overall margins and returns to remain low, ranking fourth-quartile (Q4) relative to the global chemicals peers or our Turkish non-financials coverage. With the valuation not compelling, we reiterate our Sell rating.

 

Catalyst

 

In the coming years, we believe Petkim will face rising capex as it tries to expand some of its facilities. The completion of the Socar-Turcas (STAR) refinery (which we do not expect to come online before 2016) is likely to bring significant synergies (we assume c.TRY100 mn pa), however as the timeline is far out, we believe it is unlikely to be priced into the current share price. In addition, this refinery coming on stream is likely to coincide with the US adding significant petrochemical capacity on the back of shale gas revolution there, shifting the global cost curve for basic petrochemicals, which would put the profitability of European and NE Asian high-cost producers like Petkim most at risk.

 

Valuation

 

We value Petkim on a mid-cycle global chemicals EV/EBITDA of 8.0x applied to our new 2013 estimate. We discount this by 20% to 6.4x to reflect Petkim’s Q4 CROCI to derive our new 12-month price target of TRY1.50.

 

Key risks

 

The key risk to our investment case would be a stronger-than-expected global GDP recovery, which would lead to a stronger-than-expected rise in petrochemical prices and expansion of naptha-crack margins.

 

Goldman Sachs Global