Azomures - August 2008
Adresa
Piaţa Charles de Gaulle, Nr. 15
Etaj 4
Bucureşti, Sector 1
Telefon
+40-21-306.12.31/33
Fax
+40-21-230.06.84
Website
www.rciro.ro
Trading on a derisory P/E
The Company: Azomures (AZO) is Romania’s largest producer of chemical fertilizers with an annual production capacity of 1.8 mn tons. AZO is majority owned (75%) by Transworld Fertilizer Holding, a Luxemburg registered company controlled by Turkish investors. A minority stake of 7.7% is owned by the restitution fund Proprietatea, while the free float is cc. 17.3%.
AZO produces mainly nitrogen fertilizers. Nitrogen is by far one of the major plant nutrients accounting for cc. 60% of total world consumption of fertilizers. AZO is oriented towards export markets, though the share of domestic sales has gradually increased to 30% last year, signaling the strengthening of local farmers’ purchasing power. Over the last two years, AZO invested some RON 27 mn mainly for environment protection projects. By end-2015 another EUR 20 mn shall be invested to meet EU environmental requirements.
Financial results: Similarly to other players, AZO benefited from a sharp increase of the fertilizer prices. The results became visible in 4Q 07, when the net profit jumped to RON 27 mn. In 1Q 08, the company surprised again with a record level of quarterly profits (RON 55 mn). Besides strong fertilizer prices, the first quarter results were also helped by a USD 40/1000 m3 discount granted by Romanian state to domestic fertilizer producers.
Fertilizers market: Starting last July-August 2007, the fertilizer prices have grown aggressively and reached an all-time record, thus making the industry attract interest like never before. The industry seems set to a bright future at least for the short to medium term. The increase demand for agricultural products fuelled by the food and biofuels industry would encourage farmers to expand arable land and crop yields, both requiring additional land fertilization. At the same time, the risks associated with the industry players include China’s decision regarding export tax on urea and natural gas price development.
Outlook: AZO proved its ability to benefit from a favorable sector environment, improving its profitability over the last two quarters. Based on the fertilizer prices evolution in 2Q 08, we expect AZO to post strong second quarter results. Taking into consideration that the market is betting on strong fertilizer prices in the short to medium term, we believe AZO has a good chance to further surprise the market. Based on our 2008 estimated net profit of RON 210 mn, AZO is currently trading at a 2008e P/E of 2.1, way below its western peers’ average of 8.4x. Therefore, we consider AZO an attractive opportunity for a short to medium term investment.
Company profile
Azomures (AZO) is Romania’s largest producer of chemical fertilizers and the sole domestic producer of melamine. AZO mainly produces nitrogen fertilizers such as ammonium nitrate, calcium ammonium nitrate (CAN), urea, NPK complex fertilizers and liquid fertilizers (UAN). It should be mentioned that nitrogen is by far the largest nutrient, accounting for cc. 60% of total world consumption.
Melamine is an organic compound used to produce melamine resin, a synthetic material which is fire resistant and heat tolerant. Uses for melamine include manufacturing of whiteboards, floor tiles, kitchenware, fire retardant fabrics, and commercial filters. Melamine can be easily molded while warm, which makes it ideal for a vast industrial application.
Azomures has an annual production capacity of cc. 1.8 mn tons of chemical fertilizers and 12 ts tons of melamine. Below we present company’s annual production capacities and their utilization rates over the last three years.
The output of fertilizers fell in 2006 mainly due to weak sector environment, but also the disruption of the production process. Over 2005-06, the company passed through difficult times. With the sharp increase in the natural gas price, AZO’s key raw material accounting for cc. 75% of total cash COGS, the majority shareholders made several public announcements about shutting down the plant’s activity if the government does not find ways to help gas-based industrial producers. On the other hand, there were several strikes with employees demanding higher salaries.
Traditionally, Azomures is exporting the largest part of the output. Its main export markets are USA, Hungary and Turkey. Over the last years, however, the share of export has gradually reduced. Thus, in 2005 as much as 82% (in volume terms) of fertilizers were exported, while in 2007 exports decreased to 69%. The increasing weight of domestic market is explained by higher purchasing power of local farmers, which enables them to apply modern technologies for traditional crops. Not less important are the European Union subsidies for agricultural sector. Below we show fertilizers sales breakdown (in volume terms) by countries.
Shareholders
AZO is majority owned (75%) by Transworld Fertilizer Holding, a Luxemburg registered company controlled by Turkish investors. A minority stake of 7.7% is owned by the restitution fund Proprietatea, while the free float is cc. 17.3%.
Azomures is the majority owner (88.54%) of Chimpex SA, a Black Sea port operator, which is listed on the OTC market RASDAQ. Chimpex is specialized in handling and depositing bulk material such as metal products, solid chemical products (including fertilizers), grain, construction materials and other. Azomures exports most if its fertilizers through Chimpex. In 2007, the turnover of the company amounted to RON 24.4 mn, cc. 30% down yoy, while the bottom line was in red (RON 5.6 mn). In 1Q 08, Chimpex reported a net loss of RON 2.5 mn.
Azomures also held a 50% stake in Depomures, which owns a 300 mn cubic meters gas storage facility located in a depleted natural gas field in Targu Mures. In October 2007, Azomures (AZO) announced that it has reached an agreement to sell its 50% stake held in Depomures to Gaz De France for USD 20 mn. The transaction was completed in 2007 with Azomures reporting a net gain of RON 47 mn.
