Daniel Balakov
We present our follow-up note on OCI N.V. (OTCPK:OCINF), a leading global fertilizer company. We previously issued a Buy rating on the stock, highlighting the strong tailwinds of the nitrogen and methanol businesses, the exposure to green trends, significant free cash flow generation, and a valuation discount. The stock has returned nearly 16% including dividends since our note, and the company has pursued significant asset sales over the last couple of months. We will provide a brief overview of the Q4 results, analyze the recent transactions, and revisit our investment case in light of the strategic review.
Q4 Results
OCI’s Q4 results were largely in line with sell-side analyst consensus. OCI’s Q4 sales declined 45% year-on-year (as a result of lower nitrogen volumes and lower prices) and increased 13% quarter on quarter. Adjusted EBITDA was nearly 3% higher than VA consensus at $310 million and EPS came in at $0.98 missing the consensus. FCF came in at negative $975 million and net debt stood at $3 billion. Capex came in at $239 million, while management commented 2024 capex will be around $600 million and be mostly going towards Texas blue ammonia.
Management stated its optimistic outlook on urea prices, which are going to be supported by Chinese export restrictions, havoc in the Red Sea, as well as limited supply over the midterm. In addition, the management believed ammonia demand is likely to be higher, supported by the development of new applications and incremental demand in East Asia. OCI’s management also has a positive outlook on methanol prices, supported by higher oil prices and limited new supply. We have a neutral view of the operating results and believe that the main driver of OCI’s share price is currently the strategic review and cash distribution.
Strategic Review And Asset Sales
In March 2023, OCI’s board approved the strategic review of all business lines, aiming to crystallize value. In December 2023, OCI announced two major transactions. As part of its strategic review, OCI is selling its 50% stake in Fertiglobe (the Abu Dhabi and North Africa nitrogen operations) to its partner ADNOC (which has an ambitious strategy in chemicals) for a total consideration of $3.62 billion. OCI will also receive an earnout component throughout 2024 and 2025. The deal is subject to pending regulatory and antitrust approval and is expected to close in 2024. A few days later, OCI announced the sale of its entire stake (100%) of its subsidiary IFCO (Iowa Fertilizer Company) to Koch Industries for a total consideration of $3.6 billion. The net proceeds are likely in the range of $2.6 billion. The transaction does not require a shareholder vote approval but is subject to pending antitrust and regulatory approval and is also expected to close in 2024.
Combined, the sales amount to a $7.2 billion gross cash considerations. The company estimates net proceeds in the range of $6.1-6.2 billion or ca. €27 per share. OCI will also receive the dividend from Fertiglobe’s last half and cash flows from IFCO until the completion of the transaction.
OCI NV Q4 Presentation
The company stated the gross proceeds will provide flexibility to deleverage at the group level, invest in the energy transition space, and return capital to shareholders. Further strategic actions are being considered regarding the remaining business. OCI’s management forecast $600-700 million of midcycle EBITDA and nearly 50% FCF conversion for the remaining business, excluding the contribution from Texas Blue. The net debt currently standing at $3.7 billion will become a net cash position by the end of the year and during 2024 nearly $3 billion or around 60% of the current market capitalization will be distributed to shareholders. It is unclear how, but that will mostly depend on tax efficiency. Regular dividends will be meanwhile halted.
RemainCo Valuation And Updated Investment Case
Pro-forma, excluding the Texas Blue Ammonia project, OCI has sold 2/3rds of its profits. Methanol and nitrogen exposure significantly increased post the transactions. The Texas Blue Ammonia project in collaboration with Linde should be completed by 2025. OCI is focused on creating and maintaining a first-mover advantage in the industry. There have been multiple project announcements, but OCI’s is the only implemented one.
OCI NV Q4 Presentation
OCI has a current market capitalization of $5.6 billion. We forecast a net cash position of $4 billion by FY2025, implying an enterprise value of $1.6 billion. We forecast a $500 million 2025 EBITDA of the RemainCo in line with company comments, and around $50 million of corporate and other expenses, implying a net EBITDA of $450 million. Assuming a 50% conversion, this implies a $225 million FCF. This implies a 14% FCF/EV yield. We value the RemainCo at 7x EV/EBITDA in line with OCI’s historical average or 14x EV/FCF (approximately 8% yield) implying an EV of $3.2 billion. The multiples look even more attractive on midcycle ($600-700 million) numbers. We arrive at a target equity value of $7.2 billion or €6.4 billion, implying an upside of 27% and a share price of €32. We maintain our buy rating on OCI shares amid the strategic review/break-up of the firm.
Risks
Downside risks include but are not limited to weakness in the underlying agricultural markets and lower crop prices, increased supply from new capacity additions given the low barriers to entry, lower nitrogen, ammonia, and methanol prices, lower utilization rates, higher natural gas prices, unfavorable weather events, inability to complete the announced transactions, misallocation of capital, etc.
Conclusion
We maintain our buy rating and see a more than 25% return over the next year.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
