Norway’s Yara shares down on results, stock pain to persist – analyst

LONDON (ICIS)–Yara’s shares fell over 7% in Thursday morning trading after the Norwegian fertilizers major posted losses in the fourth quarter as low prices bit earnings, while analysts at Bernstein Research still expect a 22% downside risk for the stock.

Having closed on Wednesday at Norwegian kroner (NKr) 344.20 ($41), Yara’s shares were trading by 10:15 GMT down 7.6% to NKr319.80.

Bernstein Research’s analysts placed their 12-month share price target forecast at NKr270, down 22% compared to Wednesday’s closing, although it kept its valuation on the stock at ‘Market-perform’, or ‘Neutral’ in other investment banks’ terminology.

Although some fertilizers prices started recovering in the fourth quarter, compared to the third quarter, it was not enough to lift year-on-year quarterly earnings at Yara, which posted a net loss of NKr333m for the October-December period, down from net income of NKr434m in the fourth quarter of 2015.

Lower prices also took sales for the quarter down 13% to NKr22bn, while operating revenue fell by 24% to NKr521m.

For the full year of 2016, the company’s net income fell by 21% year on year to NKr6.36bn, while sales slipped from NKr112bn to NKr97bn.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) fell by 27% to NKr15.6bn.

The sharp decreases came on the back of rock-bottom fertilizers prices, with company’s data showing all of its products posted lower prices in 2016, year on year.

Prilled urea average values for the year stood at $199/tonne FOB (free on board) Black Sea, down from $272/tonne in 2015, while ammonia prices averaged last year $236/tonne FOB Black Sea, down from $387/tonne in 2015.

Prices for diammonium phosphate (DAP) averaged in 2016 $347/tonne FOB US Gulf, down from the 2015 average price of $459/tonne. Equally, values for calcium ammonium nitrate (CAN) ended 2016 averaging $199/tonne CIF (cost, insurance, freight) Germany, down from 2015’s $270/tonne.

“Prilled urea prices FOB Black Sea increased through the quarter, and averaged $206/tonne, down 18% compared to a year ago, but 13% higher than the previous quarter. From China, export costs increased compared to previous quarters primarily due to higher coal prices,” said Yara.

“The cost inflation in China resulted in increased prices globally, despite increased production in Egypt, and from new plants in Algeria, FSU [former Soviet Union] and the US, reducing the need for Chinese urea exports.”

However, Yara conceded new capacities in the ammonia global market will continue to depress prices for the product, as new plants have come on stream in Russia, Saudi Arabia and the US already generating “a global surplus”, noting how some producers in Ukraine have curtailed output as prices below $200/tonne FOB Black Sea would not make it viable.

“Several other exporters have [also] initiated production curtailments. However, prices have increased sharply towards the end of the quarter, driven by lack of supply from the largest ammonia supplier in Russia, due to a dispute over pipeline tariffs through Ukraine,” added Yara.

Chemical analysts at Bernstein Research warned Yara’s investors that, despite EBITDA and cash flow in the fourth quarter coming at good levels, the dividend is likely to suffer as a consequence of the loss posted during the quarter.

“Volume growth was positive in Q4:16 [fourth quarter], with deliveries up YoY [year on year] in all regions, helped by a relatively easy comparison (Yara experienced several outages in Q4:15).

“[However] Yara disappointed with a dividend of NKr10 per share for FY [full year] 2016, a 33% decline from NKr15 in 2015. This was ~ [around] 20% below consensus (NKr12.3) and our estimate (NKr12.7),” said the analysts.

Moreover, Bernstein added the need for more bolt-on acquisitions to secure market share as well as the necessary capital expenditure (capex) required in the next two years will bite cash generation, weighing the stock down.

Furthermore, although energy prices have remained relatively low during 2016, with both the US and EU’s referential gas prices down year on year, the situation may change in the short  and mid term, increasing Yara’s costs.

“After a year of trough earnings, we expect gradual recovery of nitrogen fertilizer prices in the coming quarters. However, we still see long term risk to earnings due to the weak nitrate premium, which will likely persist,” said the analysts.

“Volumes have been better than expected and are likely to remain so following several bolt-on acquisitions. Nevertheless, FCF [free cash flow] generation will likely be negative over the next two years with ~ [around] NKr10bn per annum. Capex budget and potentially further bolt on acquisitions, limiting the upside in the stock.”

Focus article by Jonathan Lopez

Additional reporting by Nurluqman Suratman

($1 = NKr8.32)

Pictured above: Yara-produced nitrogen fertilizers stored in a farmer’s barn
Source: Tim Scrivener/REX/Shutterstock