We reduce our average K+S EBITDA forecasts by 11%, our target price to
€22/share, and our rating to UNDERPERFORM (from Neutral). We
implement our CS Global Potash price forecasts and update our estimates
following the Q3 2015 result and CMD. We remain concerned surrounding the
near and medium-term supply/demand balance across global Potash markets.
For K+S (in the upper half of the global cost curve), this increases pressure on
forward margins/returns/cash flow.
* Potash Price Pain: We drop Global Potash price forecasts by avg.
-12.5% as a function of adverse supply/demand dynamics across global
Potash markets – CS forecast op. rates decrease to 70-75% by decade-end,
from ~78%. This leads to avg. ~25% EBITDA downgrades to K+S Potash &
Magnesium earnings through the forecast period. We recognise limited
protection to earnings from K+S' speciality/SOP product offering.
* Legacy Issues: We estimate the K+S Legacy Project expansion is
~€1.4/share value dilutive, in our view. We estimate K+S require Potash
prices >$400/t for the project to be value-neutral.
* Above the Salt: We are impressed by the margin resiliency of the Salt
business through FY15E, and now forecast the division to achieve its 'Salt
2020' targets in FY18E (2 years early vs. company targets). We believe this
driven by underlying business improvement, CS est. ~300bps margin
contribution from cost saves, and holding record prices.
* Catalysts: Q1 result – 10 March 2016. Potash prices.
* Valuation: Our K+S valuation is €22/sh. This is derived using our
Discounted Cash Flow analysis for its existing European Potash assets
(€12/sh – assuming a run-off of existing reserves), and an average SOTP
approach for the Salt business (€19/sh). Our Legacy Project valuation is
€(1.4)/sh on Forward NPV / €(7.8)/sh on Total Project NPV.