market folly

We're posting up notes from the Sohn London conference 2017.  Next up is Michel Massoud of Melqart Asset Management who pitched a long of OCI (AEX:OCI).


Michel Massoud Sohn London Presentation

Long: OCI (AEX:OCI)

OCI is a fertilizer and chemical producer listed on the Amsterdam stock market. Market cap: 3.9bh euro.

Fertilizer prices are at historic lows. OCI produces urea, ammonia and methanol. Urea is trading at a 30% discount to the mid-cycle average, ammonia at a 50% discount and methanol at a 6% discount. Prices are close to the bottom. There has been no capacity growth for the last 2 years. China has reduced production of urea exports. There has also been an anti-pollution drive in China that has led to coal prices going up. Coal prices have gone up which has had a knock-on effect on fertilizer production making the economics of fertilizer production less attractive.

OCI is one of the most efficient producers of fertilizer. Even at todays low prices they still produce satisfactory cashflow, unlike 40% of the industry which is producing at a loss. OCI’s geographical location is very good. They are based in northern Europe and Iowa, US. As a result, they have a competitive advantage from not having the transport of many competitors.

OCI have added 50% extra capacity over the last 3 years. By next year they will have 75% fertilizer production and 25% natural gas. To achieve this the company has spent nearly 100% of its market cap on capex in the last 3 years. Capex and net debt are going to decline dramatically when the process is over. FCF yields will go well into the double-digit category. Net debt will decline from 5.2x to 2x by 2019.

Nassef Sawiris and his family own 42% of the business. They have a history of operating in a way that benefits all shareholders. OCI has returned 40% IRR to their shareholders since they listed in 1999.

EV/EBITDA 7.4x suggests 50% upside.

Risks – fertilizers are a commodity business and volatile. The Natural gas plant has not started producing yet so there could be delays. Leverage is high. There is country risk in Egypt and Algeria (15% to 20% of total sales).


Be sure to check out the rest of the presentations from Sohn London 2017.