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© Polimeri AD |
Business Summary
Polimeri was established in 1961, when the first plant for production of chlorine and polyvinylchloride started its operation. In late 70’s was put in operation the second plant for chlorine and polyvinylchloride. Later on an installation for production of dichloretane with a total annual capacity of 120 thousand tons, designed by Toyo Engineering, Japan started its operation. In 1991 was started a new chlorinealkyne electrolyze, licensed by HUCKER. Polimeri is the sole Bulgarian producer of chemical products, based on the chlorinealkyne electrolyze like sodium acid, chlorine, chlorine acid, dichloretane, bleach, ferrichloride, etc. Half of the production is sold abroad, mainly to Turkey.
Current market Activity (charts)
Shares of Polimeri moved above the level of BGN 14.00. The current price activity could mark a period of consolidation or even correction which will provide better entry levels. The difficulty to jump above BGN 15.00 is due to the higher multiples than the averages for the market. Most of the buyers entered the position last year with the anticipation of change in ownership, followed by the needed investments in new equipment. This created additional volatility. Institutional investors also acquired minority stakes in Polimeri. The position moved in line with the market and also posted correction after January’s peak. Volumes were higher during the period of stable prices in January which is due to larger transactions and could provide support for the price in short-term.
Financial Summary
Polimeri improved its financial results during the first half of the year but mainly due to the revenues from currency exchange rates. Costs decreased slightly as a percentage of revenues. However, the positive effect was subdued by imposed act by the tax administration totaling BGN 1.3 million. The audited report of 2006 financial statement showed three problematic points: deferred tax liabilities for BGN 3.344 million not included in the balance sheet; expired receivables for BGN 11.299 million without confirmations; investments in associated companies for BGN 3.215 million without Information for the value of those investments.
Valuation Ratios
| Enterprise Value | 74 674 672 |
| Dividend Yield - Gross | - |
| Trailing P/E (ttm) | 59.20 |
| Forward P/E (2007) | 28.55 |
| PEG Ratio (5yr expected) | - |
| Price/Sales (ttm) | 1.67 |
| Price/Book (mrq) | 0.78 |
| Enterprise Value/Revenues (ttm) | 1.67 |
| Enterprise Value/EBITDA (ttm) | 17.02 |
Profitability and Growth Ratios
| Return on Capital | 1.48% |
| Return on Equity | 1.32% |
| Return on assets | 1.17% |
| EBITDA Margin | 9.79% |
| Net Profit Margin | 2.87% |
| Revenue Growth | 12.05% |
| EPS Growth | 157% |
| Capital Growth | 2.20% |
| assets Growth | 6.32% |
Production Specifics
Polimeri is working at low capacity utilization for all its products and sales could rise substantially. The company is using chlor-alkali electrolysis for the production of liquid chlorine. The electrolysis process to manufacture chlorine and its essential co-product caustic soda requires considerable electrical power which represents up to 70% of the variable cost of production. However, it is less energy-intensive and more environmental friendly process than using mercury cells. Polimeri replaced the old mercury electrolysis in 1983. Several years ago, the company sold its equipment for production of PVC to cover debts.
Capacity Utilization (chart)
Markets
Polimeri is relying on the exports for its revenue growth during the last several years. sales abroad of hydrochloric acid posted the higher growth in 2006, which compensated the decrease of domestic sales of the product. Export of dichlorethane ceased in 2006 due to the lack of special transportation terminal which also requires investments. Polimeri is exporting its production to clients in Turkey, Romania, Bosna and Macedonia. Domestic market demand is rising slower last year. Main domestic clients are the paper mill Svilosa, producers of glass containers and power plants. Svilosa is planning to increase substantially its capacity in 2008 and we can expect solid growth of caustic soda sales.
Domestic Sales/Export sales (chart)
Quarterly Data
sales of Polimeri aren’t under any seasonal pattern. The last three years showed solid increase of revenues and lower growth of production volumes. The company managed to increase the exports and to maintain the solid growth rate. EPS showed higher volatility as the net profit of Polimeri is under the influence of exchange rates and the extraordinary items. In addition, Polimeri is source of financing for related companies, including soccer team. The company is buying resources from salt mine which also supplies Solvey Sodi and is not seasonally dependant.
Revenues/Earnings Data
Revenues (Thousand BGN)
| 2004 | 2005 | 2006 | 2007 | |
| 1Q | 4 437 | 9 081 | 11 135 | 12 059 |
| 2Q | 4 840 | 8 839 | 10 563 | 12 254 |
| 3Q | 8 196 | 10 014 | n/a | |
| 4Q | 11 026 | 11 080 | n/a | |
| Year | 28 499 | 39 014 | 43 881 |
Earnings per share (BGN)
| 2004 | 2005 | 2006 | 2007 | |
| 1Q | -0,03 | 0,46 | 0,10 | 0,10 |
| 2Q | -0,02 | 0,30 | 0,01 | 0,17 |
| 3Q | 0,08 | 0,22 | 0,30 | |
| 4Q | -0,02 | -0,77 | -0,18 | |
| Year | 0,00 | 0,22 | 0,23 |
Perspectives
The stable economic growth in Europe provides good environment for chlorine producers. However, some companies closed their mercury production facilities and switched to membrane technology or exited this sector. European capacity utilization rates averaged 85% during last three years. Germany is the largest producer, followed by France. The strong demand of caustic soda kept average stocks at historically low levels. Among western peers only Bayer is operating facilities that use chlorinealkyne electrolyze. Most of the companies are vertically integrated chemical producers that guarantee sales.
European chlorine production in 2005 (kilotonnes) (chart)
Investment Program
Polimeri decreased slightly its electricity costs after the adoption of direct negotiations with power plants. The company has own cogeneration facility but is relying on electricity from the national grid for the electrolyze. The capital expenditures are well below the amortizations. Polimeri is in process of acquiring assets for BGN 2.9 million, mainly for the production of pipes. The company has an ambitious investment program for EUR 20 million and 8 years of accomplishment. It includes conversion to membrane technology, modernization of production facilities, energy efficiency and production of household chemistry goods.
CapEx/Amortization (chart)
Ecology
The ecology problems of chemistry facilities
near Devnya are inherited from the industrialization of the region. Polimeri joined the “Responsible Care” World Initiative of the enterprises in the chemical industry. EU regulations are covering large varieties of chlorinate organic compounds, which emissions should be reduced. The carbon dioxide emissions by electricity producers also are limited and the rising energy consumption will require additional expenses from power plants that could be transferred to consumers through higher electricity prices.
Ownership
The ownership is divided between the Panamanian company JURISKANDO CONSULTANTS with 36.60% of the capital and AKB Fores with 24.80%. Both company bought their shares in the second half of 2006 from AKB Corporation and this could be restructuring of ownership and not real change.
Stock Information
| Last Price | market Cap | 1Y Range | Average Volume (3m) | Beta | 1Y Change | SOFIX Change | BG40 Change |
| 14.00 | 74 543 182 | 4.97-14.46 | 2 287 | - | +181.12% | +73.30% | 126.62% |
Valuation
Prices of Polimeri shares jumped solidlyand the valuation ratios also increased as the financial results were unable to sustain such growth. The market is pricing in lots of good news and only the positive perspectives for the company.
Multiples analysis
Most multiples of Polimeri are above the market averages for Bulgarian industrial companies. Moreover, the expected profit for 2007, based on 15% sales growth and slightly improved margins, also shows forward P/E multiple above 30. The ratio that currently supports the price is P/B of 0.78. The market capitalization is lower than the shareholders’ equity and could provide additional support for the price in short term horizon. However, better profits are required to support further price gains as the P/E and EV/EBITDA ratios are high. The low capacity utilization resulted in the combination of higher P/S and low P/B.
| Last Price | 14,00 |
| Number of Shares | 5 324 513 |
| market Capitalization | 74 543 182 |
| Net Profit (ttm) | 1 261 000 |
| P/E | 59,11 |
| Revenues (ttm) | 44 805 000 |
| P/S | 1,66 |
| Equity | 95 318 000 |
| P/B | 0,78 |
| EV | 74 568 182 |
| EBITDA | 4 388 000 |
| EV/EBITDA | 16,99 |
| EV/Revenues | 1,66 |
Peers Comparison
Most of the chlorine facilities in Europe are owned by large multinational companies like Solvay, Rhodia, BASF, Dow Chemical and Bayer. They are vertically integrated companies that can afford to maintain very low margins in the chlorine and caustic soda production. Peers with similar profile are the two Czech companies and the Romanian Oltchim. BASF and Akzo Nobel production of chlorine and caustic soda have EBIT margin of 12% and 9.5%, respectively. Polimeri has lower EBIT margin which will bear the burden of tax act and the volatile currency rates this year.
Peers Comparison (table)
Price Target
The imposed act by the tax administration makes 2007 profit uncertain. However, the improved profit margins due to higher capacity utilization, electricity generation and investments in new equipment will results in better net profits for 2007 and 2008. Increased production of paper mill Svilosa will also contribute to sales. Our price target for end-2007 is in the range between BGN 14.49 to 17.16 based on the expectations for 35 P/E and 0.80 P/B ratios.
| 2006 | 2007 | 2008 | |
| Revenues | 43 881 000 | 50 463 000 | 58 032 000 |
| EBITDA | 4 558 000 | 5 551 000 | 6 964 000 |
| Net Profit | 1 246 000 | 2 611 000 | 3 883 000 |
| Equity | 93 854 000 | 96 465 000 | 100 348 000 |
| Expected P/E | 35 | 30 | |
| Price Target | 17,16 | 21,88 | |
| Expected P/B | 0,80 | 1,00 | |
| Price Target | 14,49 | 18,85 |
Recommendation
The one year target for mid-2008 is the average of the two ranges for end-2007 and end-2008 or BGN 18.10. The two ratios P/E and P/B have equal weight for the calculation but the more conservative approach is the calculation by P/B. Any positive earning surprises could turn the attention to profits. If Polimeri maintains the sales growth in 2008, which looks probable due to the expected increase of domestic demand and the economic boom in the region, P/E of 30 to 35 could send share price above BGN 20. Moreover, the news of majority ownership change could also provide solid support for Polimeri shares.
The one year price target of BGN 18.10 is 29% above the current level and is in line with our expectations for at least 30% increase of Bulgarian stock market for the same period. This is the reason to give market Perform recommendation for Polimeri shares. The company’s financial results are volatile and any negative surprises will raise the question for the risks of corporate governance, collection of receivables and energy inefficient production.
Financial Data (tables)
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To view the original document, please click on the link below:
http://reports.aiidatapro.com/BBB/elana/Polimeri-2007_08_02.pdf
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Copyright: 2006 Elana Trading. All rights reserved.For further Information please contact Elana Trading, 49 Bulgaria blvd. , 1404 SofiaPhone: +359 2 810 00 40, fax: +359 2 810 00 99, e-mail: research@elana.net, web site: http://www.elana.net
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Polimeri-2007 08 02.pdf, 89 Kb
