Research Notes
Silvinit: output matters, not price
| 08.06.10 |
We have revised our valuation model for Silvinit and resume coverage of the company. The updated model is based on the IFRS accounting standards. In addition, we have taken into account the recent changes in the potash market, clarified the investment program according to information provided by the company, and taken into account the risk related to the future introduction of potash export duties.
- Potash demand grows. We saw a significant surge in potash demand in 1Q2010 in comparison with the year-earlier period, a factor than enabled Silvinit to boost output by 120% to 1.14 mn tons.
- ... Prices remain stable. Global spot-prices for potash have stayed almost unchanged YTD. The potash market has stabilized, as a major portion of potash-making capacities currently stand still, and are ready and waiting to meet any possible growth in demand over the short-term. In view of this, we do not expect prices to change somewhat radically until the end of the year. The average annual price for standard potash (FOB Vancouver) in 2010 is estimated to be at about USD 358 per ton.
- Financials bound to increase on the back of production growth. The surge in demand should enable Silvinit to increase 2010 productive output by 28% y-o-y to about 4.5 mn tons of potash. This, in turn, should lead to a 22% growth in EBITDA, up to RUB 27.8 bn, and a 51% rise in net income, up to RUB 16.3 bn.
- Key risk: potash export duties. The Russian government is likely to impose the duty on potash exports to replenish the budget in light of ongoing fiscal troubles. Our updated valuation model for Silvinit allows for a 5% duty to be introduced in July 2010. We have also assessed the sensitivity of the company’s target price to a possible change in the export duty size and have come to a conclusion that a 1 pp rise/fall in the export duty by contrast with our base-case scenario (5%) could cause a 1.88% change in the fair price.
- Cheap on market multiples. Silvinit is valued at a 29% discount on 2010 P/E and 17% discount on 2010 EV/EBITDA in comparison with foreign peers. The discount to the company’s closest Russian peer, Uralkali, is even larger: 51% on P/E and 48% on EV/EBITDA. We consider this huge discount as unjustified, especially against Uralkali, as Silvinit produces and sells more than its Russian rival, and should therefore post higher revenue, EBITDA and net income in FY2010.
We have increased out target price for Silvinit by 23% to USD 1056 per common share and USD 634 per preferred share. Both securities have been assigned a BUY rating.
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Sectors: Chemicals & Petrochemicals, Mineral FertilizersCompany: Silvinit