Is BZN a bargain? – The capital market

We leave the recommendation for the BZN share on “Buy” and update the target price at NIS 1.05 – a 41% premium to the market price. The recommendation continues to be based on the economic gap between the share price (and the European sector) and the representative profitability of the industry. The refining that was at the forefront of closures around the world is showing signs of recovery with the start of the spring season, thanks to the positive effect of moderating morbidity and vaccines.

The refining industry is entirely dependent on the horizon of the global exit from the Covid 19 epidemic. Meanwhile, although this injury is still significant, there has been an improvement in reference intervals. The reasons for this are: global economic recovery, strong demand for petrochemical products and a tight supply of oil. The price of oil at this stage maintains the relationship between pricing and real demand for commodities because of OPEC’s regulatory policy. Thus, the commodity price is rolled into products, and not cut at the distilleries, which are the real buyers of oil.

Note that the price of the stock, as well as our target price, still expresses the fragility of all these trends, but we believe that the pricing of the sector does not yet express economic equilibrium even in a world that is moving from fossil energy to renewable energy.

The advantage of the BZN share stems from the pricing: In our opinion, the downside is a domain despite the risks. In our opinion, although there is no significant discount here, we assume that the company will move with the sector.

Segment structure change in Q4: Last quarter’s EBITDA met our expectations with a stronger internal division in favor of the $ 36 million polymer segment, which presented EBITDA. The refining segment, which was merged in the fourth quarter with Gadiv (Aromatics), presented a neutralized EBITDA of $ 1 million following the merger.

According to an average of 9 months, it can be assumed that Gadiv contributed at least about 8.3 million in the quarter. CAOL (polymers) presented results that were similar to the second quarter, and better than in the previous quarter – with EBITDA of about $ 36 million

What to expect in the first quarter of 2021: The increase in the regional reference margin supports the chances of returning to the profitability of the refining sector (even without Gadiv’s influence) and presenting a positive neutralized EBITDA of approximately $ 10-14 million (according to the old report). It should be noted that despite the decrease in standard deviations in the price of oil, the company is once again making considerable efforts to reduce exposure to inventory, after the sharp rise in oil prices. The company is not taking their risk now and is exercising caution, purchasing oil in the near areas

The year that was: Despite the turbulent year for the industry, the reported offset EBITDA for 2020 was $ 121 million. The petrochemical sectors, as expected, contributed the positive result, while the refining sector deleted most of it in the consolidated report. It should be noted that polymer ranges are at peak intervals today. At the annual level, the polymer sector recorded EBITDA of 122 million and at the annual level, probably at least 33 million.

It should be noted that the loss of the refining sector was due to the effect of the Covid 19 epidemic on air and land traffic, and was intensified by unprecedented volatility in oil prices in the first half of the year. % On average, hurt profitability. Fixed expenses decreased during 2020 by about 9% due to the company’s efforts (and thanks to a tax benefit), but still stood at about $ 3.3 per barrel. In addition, at the height of the global crisis, the goal of the world’s refineries was to “sell inventory at all costs” in order not to “get stuck” and stop operations. Thus appeared a negative oil price, resulting from a lack of demand and filling of storage sites. In this situation, the refineries have almost completely given up on optimization, in order to allow for ongoing operations.

Our cash flow forecasting model cuts a target price of about NIS 1.05 with an upside of about 41%. The model is based on assuming an average margin of $ 4 in 2021 (84% refining efficiency) and 4.5 in the representative year.
According to the market approach, the EV / EBITDA multiplier derived from our forecast for 2021 – 12X does not cut an upside against the median of the comparison group. We believe that the share price will move in coordination with the comparison group.

Bottom line: The BZN share still reflects a value of cyclical lows, with the global refining industry functioning contrary to economic rationale with the buds of recovery. We recommend the BZN share on the “Buy” recommendation with an upside of about 41%.