Ciech — Turnaround success, but supply risks ahead

Ciech — Turnaround success, but supply risks ahead

The positive effect from incremental volumes under the Soda +200 project on Ciech’s 9M17 earnings was offset by lower soda ash prices and raw materials cost inflation. More recently, soda spot prices in China have risen amid local supply curbs. However, supply from Ciner’s new facilities in Turkey may put pressure on 2018 contract prices. Ciech’s competitive response includes focus on product quality, strengthening the logistics chain and client relationships, as well as extending contract length. The company also aims to further improve product portfolio diversification. Ciech’s shares trade on a 2017e P/E of 8.1x, c 40% below its peer group.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Ciech

Turnaround success, but supply risks ahead

Chemicals

QuickView

20 November 2017

Price

PLN56.3

Market cap

PLN2,967m

Share price graph

Share details

Code

CIE

Shares in issue

52.7m

Net debt (€m) as at 30 September 2017

250.8

Business description

Ciech is a major European producer of soda ash used for the manufacturing of glass and granular detergents. It also provides sodium bicarbonate and salt for chemical and food industries, as well as water treatment processes. Other products include plant protection chemicals, resins and polyurethane foams.

Bull

Growth investments across segments.

Relatively good position on the cost curve.

Shares trading at a discount to peer group.

Bear

Additional supply from Ciner’s new projects may put pressure on soda ash prices.

Cost inflation impacting raw materials margins.

Earnings diversification still limited.

Analyst

Milosz Papst

+44 (0)20 3077 5700

The positive effect from incremental volumes under the Soda +200 project on Ciech’s 9M17 earnings was offset by lower soda ash prices and raw materials cost inflation. More recently, soda spot prices in China have risen amid local supply curbs. However, supply from Ciner’s new facilities in Turkey may put pressure on 2018 contract prices. Ciech’s competitive response includes focus on product quality, strengthening the logistics chain and client relationships, as well as extending contract length. The company also aims to further improve product portfolio diversification. Ciech’s shares trade on a 2017e P/E of 8.1x, c 40% below its peer group.

Lower soda prices combined with cost inflation

Ciech is currently facing margin pressure, with group adjusted EBITDA margin down 4.1pp to 21.3% and adjusted EBITDA declining by 13.9% to €557m in 9M17. This is mainly due to lower profitability in Ciech’s core soda segment (87% of group adjusted EBITDA in 9M17) resulting from slightly lower soda ash prices vs the prior year, coupled with the higher costs of gas, coal and furnace fuel. Soda sales were broadly stable y-o-y in 9M17 despite the planned production outage in Janikowo. In the Organic division, the increase in the price of raw materials for the production of foams and resins was offset by strong sales of MCPA- and glyphosate-based products, good foams volumes and positive portfolio effects in resins.

Strengthening core while seeking diversification

The company has undergone a multi-year restructuring process initiated in 2012 and last year completed its flagship Soda +200 project, which was aimed at boosting soda capacity at its Inowroclaw site from 600,000 to 800,000 tonnes per year. Ciech aims at a shift towards higher-margin sodium bicarbonate and salt products. It is also investing in expanding other revenue streams such as plant protection products, where its target is to double its market share in Poland by 2019 (from c 6% in 2014). The company continues to de-leverage, with net debt/EBITDA down from 3.9x in 2011 to 1.35x in Q317 and a target set for 2019 at <1.0x.

Valuation: Discount reflects limited visibility

Ciech’s shares currently trade at a 2017 consensus P/E of 8.1x, which represents a c 40% discount to the peer group, although the valuation gap narrows somewhat to c 26% in 2018e. This most likely reflects the uncertainty around the impact of new supply from Turkey on soda ash prices and Ciech’s capacity utilisation in 2018.

Consensus estimates

Year
end

Revenue
(PLNm)

PBT
(PLNm)

EPS
(PLN)

DPS
(PLN)

P/E
(x)

Yield
(%)

12/15

3,273

277.4

6.51

2.85

8.6

5.1

12/16

3,455

625.0

11.26

0.00

5.0

N/A

12/17e

3,527

469.0

6.93

2.82

8.1

5.0

12/18e

3,473

372.0

6.07

2.89

9.3

5.1

Source: Ciech accounts, Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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