Bank downgrades Germany’s K+S Group to ‘Underweight’

21 November 2012 11:20  [Source: ICIS news]

LONDON (ICIS)--Investment bank JP Morgan Cazenove on Wednesday downgraded its rating for German potash and salt maker K+S Group to “Underweight”, as production constraints and cost inflation puts further pressure on profits.

The bank also lowered its target share price for K+S to €28.00 ($35.90) from €42.00.

“Ongoing production constraints suggest the company has limited opportunity to benefit from a potential [potash] demand recovery, while the cut in prices required to prompt such a recovery presents significant downside risk to current [full year 2012] company guidance and consensus expectations, in our view,” the investment bank said.

On 13 November, Germany’s K+S Group lowered its 2012 operating earnings estimate to the lower end of its previously forecasted range of €820-900m, due to weakness in its potash fertilizer and de-icing salt businesses.

For full year 2012, K+S now expects operating earnings before interest and tax (EBIT) to be around €820m, while earnings before interest, tax, depreciation and amortisation (EBITDA) in 2012 are now expected to be around €1bn, at the lower end of a previously forecasted range of €1-1.1bn.

K+S expects its global potash sales volume to be 54m tonnes for 2012 – about 2m tonnes lower than its earlier estimate of 56m tonnes.

The company said that in the potash segment, absence of contract conclusions with Chinese and Indian customers has put pressure on prices and led to more cautious behaviour among buyers across the globe, although the group forecasts demand to recover in 2013, as potash customers in China and India are expected to come back to the market by then.

JP Morgan Cazenove said: “The prospects for a recovery in global potash demand in 2013 hinge on a contract settlement with China, in our view, although there remains a considerable gap in price perception between buyers and sellers.”

“While we expect any Chinese contract settlement would trigger a rebound in potash demand, K+S management guidance for flat [year-on-year] potash sales volumes in 2013 reflects ongoing production bottlenecks over pure conservatism in our view. This lack of volume growth, combined with falling prices and ongoing cost inflation… lead us to forecast a 25% [year-on-year] decline in Potash profits,” it added.

Additional reporting by Deepika Thapliyal

($1 = €0.78)

By: Franco Capaldo
+44 (0)20 8652 3214

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