Bank questions wisdom of Lotos, Azoty petchem 'mega-investment'

04 December 2013 16:19 Source:ICIS News

LONDON (ICIS)--Equity investors should probably steer clear of Poland's Grupa Lotos and Grupa Azoty until more precise details about their planned zloty (Zl) 12bn ($3.9bn, €2.9bn) petrochemical complex in Gdansk are made public, an investment bank said on Wednesday.

“What we already know is that the pure size of the planned project – nearly $4bn versus Grupa Lotos's market capitalisation of $1.6bn and Grupa Azoty's $2.3bn – and the time horizon imply that equity investors are probably better off avoiding these names in the next three to five years, until the project details and economics become more visible,” WOOD & Company analysts Robert Rethy and Piotr Drozd said in a note to investors.

“We also believe that any rationale for an ethylene-based coastal project may be highly questionable, given the massive ethylene cracker investments taking place in the US in the next five years on the back of the cheap local [shale] gas, with much stronger economics than in Europe,” they added.

Grupa Lotos, the analysts determined, was not yet ready for such a large-scale project as it remained highly leveraged following a $2bn refinery upgrade project, and still had nearly Zl 6bn of net debt.

“Its track record regarding such 'mega-investments' is mixed, to say the least,” they added.

The Polish government, which through treasury ministry shareholdings controls both Lotos and Azoty, has backed the petrochemical investment arguing that it was needed to help reduce Poland’s chemicals and primary plastics trade deficit, which the two companies said stood at minus Zl 16.7bn in 2012.

However, Rethy and Drozd noted that “what may be positive for the country and for the region may not necessarily be positive for equity investors”.

The sizable investment outlays required for the project were likely to result in increased gearing for Azoty, reducing the company’s dividend capacity, and, potentially, limiting the scope and scale of further upstream investments within its fertiliser value chain, they added.

“Against the uncertain returns from the sizeable investment and continued headwinds to fertiliser profitability, we reiterate our negative stance on Grupa Azoty,” the analysts concluded.

Lotos and Azoty on Tuesday signed an agreement to form a special purpose vehicle (SPV) for the creation of the petrochemical complex in Gdansk on the Baltic Sea coast.

The agreement commits Lotos and Azoty to move from the initial feasibility state to the full feasibility study stage for the investment and to make a final decision in 2014 on whether they should go ahead with it.

Polish state-owned infrastructure financing vehicle Polish Investments for Development (PIR) has signed a preliminary agreement to provide financing of up to Zl 750m for the investment.

Construction of the complex would take place from 2016-2018 and commercial production would begin in 2019, Lotos and Azoty said.

($1 = €0.74, $1 = Zl 3.09, €1 = Zl 4.20)

By Will Conroy