Good Enough, Just Not Popular
- Showing EPS growth rate close to peers after eliminating tax and base effects, yet trades at significant discount
- Chemical M&A have been value destructive historically; we prefer companies that like to return cash
- Maintain Buy on SIDPEC with TP of EGP17.5/share and 25.0% upside
EPS growth comparison distorted by tax and low base effect. SIDPEC's EPS growth is hammered down by taxes while it is buoyed artificially for some other companies because of lower base to start with. Average EPS growth rate of petrochemical companies after eliminating these effects drops to 12% from 20% while SIDPEC's increases to 13% from 2%. SIDPEC's underlying EPS growth rate is much better than it appears, but it trades at a significant discount to its peers.
Large upside despite weaker price assumption going forward. HC Research is already factoring in weaker petrochemical prices going forward. HC Research is not factoring in any price increase for 2011e, which makes HC Research believes its EPS estimates are conservative. Despite bearish price assumptions, HC Research is still 37% higher than consensus. HC Research product price sensitivity model shows that the stock has more than 20% upside even if product prices fall 10% in 2010e.
HC Research prefers cash return to shareholders over cash spent on M&A deals in the chemicals space. Historically, chemical M&A deals have been value destructive for shareholders of the acquirer. Short-term gains in cost synergies are not sustainable. Premium paid for the deals are not justified by the synergies extracted and hence lead to significantly lower ROIC after the deal HC Research prefers companies, like SIDPEC, which like to return cash to shareholders rather than pursue expensive deals.
First among equals in terms of cash generated and returned per share. SIDPEC's dividend yield on average has remained 10% over the past five years-- far higher than its peers. Going forward, distributable cash generated by the company is even better. In the next five years, the company is expected to generate around EGP13.0/share of distributable cash much of which will come back to shareholders in the form of dividends.
HC Research rates SIDPEC as Buy with a TP of EGP17.5/share (25% upside). HC Research uses a weighted average to arrive at SIDPEC's TP by assigning 50% weight to the market-based relative valuation and 50% to the DCF valuation. Capacity expansion is the biggest upside catalyst. HC Research estimates the feedstock supply agreement would add EGP3.4/share or 20% to its TP.
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© Press Release 2010
