BorsodChem: huge FX loss dilutes strong operating performance in 1Q06
BorsodChem released its quarterly results this morning. Net profit came in at HUF 2.41bn for 1Q06, down 52% y/y and 25% below market consensus. It also lagged 26% behind our own forecast on unexpected high FX losses on its foreign currency debt. However, operating performance was very strong, showing an impressive 75% increase q/q. This was partly due to expected factors (a spectacular price improvement of TDI in 1Q and increase in MDI sales volumes) but also due to the unexpected consolidation of Petrochemia Blachownia.
While product price trends were in line with our expectations, volumes came slightly lower, especially in case of MDI. We predicted 30kt MDI sales for 1Q06 but the actual figure came at 25kt only. For the whole year we forecast 140kt, in line with the management’s guidance, so the following quarters should come in stronger.
Despite overestimated MDI volume, total sales came 7.3% ahead of our estimate which is mainly due to the consolidation of Petrochemia Blachownia, the recently acquired Polish benzene/toluene producer company. In the lack of information on the regulatory approval of the deal we excluded the company’s figures from our 1Q estimate. Although BorsodChem did not provide separated figures for the new subsidiary, it total sales contribution could have been HUF 3.5bn (some 6%) according to our estimate.
Mainly due to rising MDI volumes, BorsodChem delivered HUF 6,018 million operating profit in the period, 3.2% growth y/y and 75% development on a q/q basis. The figure came 9.5% ahead of our expectation, the difference is mostly thanks to the unpredicted consolidation of Petrochemia Blachownia.
Financials delivered the negative surprise of the report. The weakening of the Hungarian forint in the first quarter had a stronger than expected negative impact on financial result, mainly due to revaluation of foreign currency debt. Since the market, ourselves included, had no deep information on debt structure and hedges analysts seriously underestimated non-realized financial losses. Mainly due to FX debt revaluation, non-realized FX losses amounted to HUF 2,764m in 1Q06. Hedges also delivered HUF 168m loss.
BorsodChem fell almost 2% yesterday, broadly in line with the market. However, the stock was up substantially in the previous days, mainly due speculation on the new strategy to be announced later today and the continued buying of the Rahimkulov family. Since the quarterly figures delivered a positive surprise on the operating level, we expect positive market reaction today. However, BorsodChem’s fundamentals are fairly unimpressive in our view: trailing 12-month EPS of 148.3 indicates a current P/E of 15.7x, well above our fair P/E estimate of 11.0x. However, since the following quarters are expected to deliver increased net profit, we stick to our FY06 EPS forecast of HUF 245. We keep our Hold recommendation on the stock, with a fair value estimate of HUF 2,448.