We reiterate our Sell rating on Unipetrol as the share price does not adequately reflect the firm’s sector-lagging earnings momentum. We view Unipetrol as expensive on all valuation measures. The company suffers from structural problems in its key business lines, which are further exacerbated by the sluggish macro conditions. Despite the firm’s strong cash position and lack of large-ticket investments in the years ahead, investors are unlikely to see any meaningful dividend. We have cut our fair value to CZK 127.5 per share, which implies 25.0% downside.
- Artificially low beta: Unipetrol’s share price has shown extremely low volatility in the last year with its beta to the PX Index averaging 0.45x versus the five-year average of 0.87x. In our view, this resilience is not driven by fundamentals. Instead, it is likely that a substantial minority position has been built by a buyer whose identity and intention remains unknown
- Reduced oil through Druzhba?: There are indications that crude oil deliveries to the Czech Republic through the Druzhba pipeline have been steadily reduced since April and that Unipetrol has had to shift the majority (50-60%) of crude deliveries from Druzhba to the IKL and TAL pipelines. As the acquisition cost of crude through this route is roughly US$ 1.5 higher on each barrel (mainly due to logistics issues), it is critical for Unipetrol to restore Druzhba supply as quickly as possible. With its structurally and geographically inferior assets, Unipetrol’s margin capture is already worst-in-class. Hence a prolonged feedstock disadvantage could make the whole refining process completely uneconomic. We estimate that 50% lower supply through Druzhba would wipe out roughly CZK 400m (or 12%) of the firm’s 2012F EBITDA.
- Premium unwarranted: On a 2012F EV/EBITDA of 9.3x, Unipetrol trades at a premium of 38% (!) to the sector median. We believe the premium is prohibitively high given the wide ROCE gap to peers and the firm’s inability to pay a meaningful dividend despite a strong balance sheet.
Complete sector analysis is available here.