European Fertilizer Overcapacity And Polyolefins Risks Will Pressure Earnings Recovery

Catalysts

About Grupa Azoty

Grupa Azoty is a Polish chemical group focused on fertilizers, plastics, and specialty chemicals, with growing activities in chemicals for defense.

What are the underlying business or industry changes driving this perspective?

• Structural overcapacity and weak demand in European fertilizers and plastics, combined with continued competitive imports from outside the European Union, risk keeping product prices low and volumes under pressure, which could cap revenue growth and limit operating leverage.
• Reliance on prolonged waivers, high net debt to EBITDA above 13 times, and the need for multi stage equity issues to recapitalize the balance sheet create a scenario in which higher financing costs and potential dilution constrain future earnings recovery.
• Extended monetization risk around the Polyolefins assets, including the possibility that the Orlen transaction is delayed, repriced, or fails, would leave the group with cash tied up in a structurally loss making project, depressing net margins and stressing liquidity.
• Persistently low profitability in key downstream markets such as Automotive and Construction, alongside rising imports of both raw materials and finished goods from Asia, could lock the Chemicals and Plastics segments into subscale, low margin positions that drag on consolidated EBITDA.
• Heightened regulatory and environmental requirements in the European Union, including energy transition related schemes that may lift input costs after the current gas and coal price trough, risk eroding any recent efficiency gains and compressing future earnings despite flat or modestly growing revenues.

Assumptions

This narrative explores a more pessimistic perspective on Grupa Azoty compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Grupa Azoty's revenue will grow by 4.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -8.0% today to 2.9% in 3 years time.
• The bearish analysts expect earnings to reach PLN 434.5 million (and earnings per share of PLN 8.34) by about December 2028, up from PLN -1.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as PLN1.4 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.3x on those 2028 earnings, up from -1.7x today. This future PE is lower than the current PE for the GB Chemicals industry at 9.2x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained execution of the Azoty business recovery program, combined with four consecutive quarters of positive EBITDA in the core business and visible cost efficiencies from lower labor and raw material usage, could drive a structural improvement in profitability and investor confidence, supporting higher earnings and EBITDA margins.
• If the Orlen transaction for Grupa Azoty Polyolefins is completed on the proposed cash free, debt free basis, it would inject over PLN 1 billion of liquidity, simplify the balance sheet, and remove a loss making asset, reducing net debt and potentially improving net margins and earnings.
• Securing long term agreements with financing institutions alongside the planned two stage equity issuance to recapitalize the group may stabilize funding, lower perceived solvency risk, and enable more rational CapEx, which would support revenue growth and earnings over the medium term.
• Supportive regulatory trends in the Agro segment, including higher customs duties on Russian and Belarusian fertilizers and gradually tightening import conditions, could improve regional pricing power, lift fertilizer volumes once excess inventory clears, and enhance segment EBITDA and consolidated revenue.
• Strategic focus on core segments and the emerging Chemicals for Defense business, underpinned by cooperation with PGZ and growing European defense spending, may open higher margin, less cyclical revenue streams that improve long term earnings visibility and group net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Grupa Azoty is PLN15.0, which represents up to two standard deviations below the consensus price target of PLN18.31. This valuation is based on what can be assumed as the expectations of Grupa Azoty's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PLN21.24, and the most bearish reporting a price target of just PLN15.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be PLN14.9 billion, earnings will come to PLN434.5 million, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 15.8%.
  
• Given the current share price of PLN17.71, the analyst price target of PLN15.0 is 18.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.