12 October 2012 14:00 [Source: ICIS news]
LONDON (ICIS)--Privatisation could transform the fortunes of Croatia-based fertilizer producer Petrokemija if it delivers a cheap gas supplier as a strategic owner, Erste Group Bank said on Friday.
Initiating analytical coverage of the company's stock with a 'hold' recommendation, Erste analyst Davor Spoljar said: “Recent privatization talks could turn the story around [for Petrokemija]. A cheap gas supplier as a strategic owner could add synergies, which remains a potential upside trigger. However, until we see concrete results in that field, we remain on hold.”
“While fertilizer companies globally are going through a golden period of cheap gas prices (main input) and high fertilizer prices (due to supply shortage and drought), Petrokemija is struggling to break even,” said Spoljar in his analysis.
“An unfavorable 100% oil-linked gas formula makes the company one of the least profitable fertilizer producers in the peer group. Furthermore, as the company does not hedge against USD [US dollar] movements, recent USD strengthening in combination with high oil prices weigh on profitability,” he added.
Petrokemija, which has a fertilizer capacity of 1.35m tonnes, was enjoying high sales, strong fertilizer prices and a strong market share, but cost disadvantage caused by oil-linked high gas prices made it among the least efficient fertilizer producers, Erste calculated.
“We doubt that high interim fertilizer prices could make up for unfavourable gas pricing, whereby the expected gas price reduction (from Croatian gas market liberalisation) could come too late to harvest profits from the strong fertilizer market,” Spoljar added.
Petrokemija is also burdened by a costly but necessary capital expenditure programme, he said.
However, Petrokemija's strong market share, accompanied by the upcoming European Union entrance of Croatia and the company's good regional reputation, makes the company attractive to a strategic partner, Spoljar said.
“High sales can be leveraged the most by a low cost raw material supplier, which will be able to cut feedstock costs. Furthermore, a private investor could initiate the necessary investments to catch up with environmental protection requirements and production efficiency improvements, which have so far been in the backseat,” he added.
Petrokemija is the leader on the Croatian, Slovenian and Bosnian fertilizer markets, Erste said.
More than 90% of fertilizer consumption in Croatia comes from Petrokemija, while the rest includes products not covered by the company, the bank's statistics show.
The company's production is organised into four units manufacturing fertilizer products, carbon black products, clay-based products and other chemicals.
The majority of the output is still concentrated around a variety of mineral fertilizers, including urea, nitrogen phosphorous potassium (NPK), calcium ammonium nitrate (CAN) and other mixed fertilizers, which together account for around 90% of company sales, Erste said.
Petrokemija benefits from strong logistics, proximity of the railway and a controlling stake in Luka Sibenik seaport that all in all provide more flexibility in covering shortages on the market, the bank added.
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