UBS has reiterated its "Overweight" recommendation for the European chemicals industry, which includes Israel Chemicals Ltd. (TASE: ICL) and Makhteshim Agan Industries Ltd. (TASE: MAIN).
UBS gave an "underweight" recommendation for the industry for most of 2008. It says that companies are adjusting to the declining capacity utilization in some areas. It also likes the funding situation at European chemicals companies.
UBS adds that the first quarter of 2009 were "challenging", and that demand only stabilized in March. The chemicals industry is only new pressing forward to adjust capacity to the new environment.
UBS reiterates its "Buy" recommendation for Israel Chemicals with a target price of NIS 43, compared with today's opening price of NIS 36.01. It predicts that the company's revenue will fall from $6.9 billion in 2008 to $5.05 billion in 2009, before rising to $6.54 billion in 2010. It predicts that the company's net profit will fall from $2.1 billion ($0.79 per share) in 2008 to $1.25 billion ($0.69 per share) in 2009, and rise to $2.1 billion ($0.82 per share) in 2010.
UBS notes that "Industry data suggests that potash deliveries to Europe and Brazil have grinded to a halt in the first quarter with very small business done in other spot markets. This leaves us, as in the fourth quarter, with India and Israel as Israel Chemicals' only active markets." UBS expects potash deliveries to fall to 400,000 tons in the first quarter from 500,000 tons in the fourth quarter of 2008 and 1.2 million tons in the third quarter. It also expects sequentially weaker performance in the company’s other divisions.
UBS adds, "Notwithstanding the current down-turn in fertilizers’ trade activity, Israel Chemicals remains a price-driven story. We believe long-term dynamics in the potash space would necessitate additional capacity, which can only be justified at elevated prices. With that in mind, and given the sector price discipline, we continue to favor the risk-reward at current levels."
UBS reiterated its "Neutral" recommendation for Makhteshim Agan with a target price of NIS 17, lower than today's opening price of NIS 19.08. The bank predicts that the company's revenue and profits will remain fairly stable. It predicts that revenue will dip from $2.54 billion in 2008 to $2.48 billion in 2009 and rise to $2.56 billion in 2010, while net profit will fall from $219 million in 2008 ($0.49 per share) to $198 million ($0.46 per share) in 2009 and then rise to $220 million ($0.51 per share) in 2010.
UBS notes, "Farmers are not pre-buying this year and are more hesitant on spending." In addition, an early spring is unlikely, which may delay business until the second quarter, and the strong euro in 2008 will backfire in 2009, resulting in flat revenue for the company in the first quarter.
UBS adds that Makhteshim Agan's inventory increased during the fourth quarter, resulting in excess inventory now, which will affect gross profit margins. The bank says that it would like to see greater inventory reduction, gross margin improvement, and top-line execution before it upgrading its recommendation for the company. The bank does not expect the company's first half performance to provide these catalysts due to the inventory cycle and challenging business environment, and it therefore cut its full-year 2009 profit forecast by 9%.
Israel Chemicals' share rose 3.4% by early afternoon to NIS 37.22, but Makhteshim Agan's share fell 2.6% to NIS 18.59.
Published by Globes [online], Israel business news - www.globes-online.com - on April 5, 2009
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