We raise the recommendation for the ECAL share to “over-yield” and raise the target price to NIS 21. It should be noted that, according to forecasts by many research bodies around the world, most of the rally in agricultural commodities is already behind us, and the upside that remains in the next two years is moderate.
With regard to fertilizers, in our estimation, because of the corona, there was a delay in the transmission between grain prices and fertilizer prices, and the localization trend in agriculture intensified, due to fears of disrupting supply chains. These trends are expected to support fertilizer prices. It now appears that the upside is moderate but stable, and the new annual amount entering the global potash market at a rate of about 1 m tonnes does not undermine the market. These trends, along with consistent progress in the optimization processes led by management have led us to raise our recommendation.
Quarterly results and company forecast: The company recorded a net profit of 5 cents per share against the consensus expectation of about 4 cents per share. The results of the 4th quarter were a pleasant surprise and the company’s management first published a “guidance” for 2021. It should be noted that ECL’s reports for the fourth quarter, and consequently for the entire year, beat the consensus expectations in all parameters. The improvement at the quarterly level was achieved mainly due to the recovery of revenues from industrial products (especially flame retardants – bromine) and a sharp increase in the quantities of potash. Sales in all sectors were higher than in the corresponding quarter negatively affected by Dead Sea jobs.
The company first released an EBITDA forecast for 2021 (1.02-1.2 billion we raised our forecast from the low to the high range of the Guides).
Gidens was about 5% lower than consensus expectations. We were under the impression that the company’s forecast was characterized by extreme conservatism. It should be noted that in light of the continuation of the corona plague and the slow rate of immunization in the world, such an approach certainly makes sense.
Activity sectors
Bromine: The industrial products sector was pleasantly surprised at the annual level with a decrease of only 12% in segment profit. It should be noted that compared to the corresponding quarter, operating results increased by 33%. The EBITDA of the segment accounted for approximately 39% of the consolidated adjusted annual EBITDA. The gap between the quarters was positively affected by the shutdown of activity at the Dead Sea in the corresponding quarter in 2019 and by the recovery in demand for flame retardants in the last quarter of 2020.
In our opinion, at the annual level the result reflects the policy of maintaining bromine prices at the expense of quantity during the crisis and the fixed contracts that went into operation. It should be noted that the shortage of chips for the automotive industry is a potentially significant occupied demand, which could create a further recovery this year. On the other hand, the company does not expect an improvement in the purchase of clear solutions for the oil industry this year.
potash: The potash segment contributed about 29% to ECL’s adjusted annual EBITDA. In the whole of 2020, a downward trend of about 59% from the sectoral profit segment of the potash sector, cut by the low prices in potash, works in the Dead Sea and downtime in Spain, stood out. On the other hand, in the 4th quarter, segment profit increased by 88% despite the weakness in the dollar, the increase was positively affected by sales volumes and spot prices.
It should be noted that the average potash price of ICL in 2020 decreased by about $ 56 to about $ 230 per ton (including polysulfate) and the quantity increased by about 0.53 m per tonne due to demand and improved productivity in the Dead Sea. As will be recalled, the price of the new contracts with India and China increased by 17 d to India and 27 d to China to 247 d. EC Do not mention that all her potash is addicted until the end of June. The company expects that in the second half of the year, production in Spain will increase to an annual rate of 1 m tonnes with the completion of a mining union project (unless there are new corona disturbances).
Phosphate: The annual segment profit margin of phosphate activity from total consolidated EBITDA was 27% – very close to the contribution of the potash segment. The increase in special phosphate products continued, accounting for approximately 61% of segment EBITDA in all of 2020. The segment profit of phosphate solutions per year was 61 m and 21 m for the quarter was 21 m. In the second half of 2020, after more than a decade of losses from phosphate “Commodity” recorded a price of phosphate rock on which it stood out especially in December. It should be noted that most of the sharp increase was in DAP prices, while in TSP / SSP prices, which ECAL sells, the increase was less dramatic, but shifted activity to profit. It should be noted that ECL sells phosphate mainly in Europe, Brazil and the USA, and sells acid – mainly to its partner in China.
IAS – The Innovative Solutions Division improved its results with an increase in revenue and a cut in expenses. Innovators (Specialties) recorded impressive growth in the corona year, which supported home gardening. The segment profit has doubled compared to last year to 40 m.
FCF- Despite the investments, the company created a vacant cash flow of c. 181 m this year.
Forecast 2021: We are updating the revenue forecast to about 5.4 billion d. We assume an improvement of c. 190 m d in net profit in 2021 to about 420 m d. This assumption is based on a current level of commodity prices and a strong first quarter assumption in Brom. This reflects a projected net profit multiplier of 17.5X for the coming year.
Market approach: Cuts ICL upside of about 15% for 2021 against Canadian competitors.
The Bottom Line: ICL’s share is still trading at a consistent discount to the comparison group and the reason remains the same. The exposure of the bromine sector to the world economy and the oil sector. We raised our recommendation because ICL offers a non-dramatic but realistic upside in areas that are about to benefit from improving the trend in agriculture and industry.
Market approach
The source of the data is Bloomberg, ECL – Leumi Capital Markets forecasts
The projected net profit multiplier cuts to the island. CAL Up Side Significance Against Canadian Competitors. And in front of a broader comparison group.
ICL Stock Performance ($) vs. Pumped Potassium Prices Vancouver Spot and Brazil Brazil Historical $ / t Years 1999-2021
Data source: Bloomberg
The chart shows the lag in the recovery of pitted potash in Brazil. It should be noted that corn and soybean prices in the US have recovered, thanks to the subsidy to farmers and the exceptional demand for soybeans due to the restoration of the pig population in China. Oil prices restore the viability of ethanol which also supports demand for fertilizers.