SDF Bernstein: Kicking + Screaming value. Upgrading to Outperform, TP €28

Mein TRADE CALL zu K+S bekommt nun Futter nachgereicht! Damit dreht sich Bernstein innerhalb weniger Tage um 180 Grad auf dem Absatz. Die Shorts wurden im jüngsten Abverkauf nicht einmal ansatzweise eingedeckt und betragen mit einer Quote von knapp 18 Prozent Rekordniveau.


K+S: Kicking + Screaming value. Upgrading to Outperform, TP €28

We upgrade K+S to Outperform, increasing our target price to €28. Following the stock’s underperformance this year, we see a compelling entry point for several reasons.

Potash fundamentals are turning a corner and Bethune is ramping up. Potash have ticked up to $280/t in Brazil recently, well above the ~$210/t bottom in 2016.

Although more supply is coming, healthy demand growth will absorb 65% of it and permanent closures another 20%.
The incumbents (primarily PotashCorp and Mosaic) can manage the overhang, leading to very gradual price increases. Post 2025, we forecast $350/t, well below the $400/t incentive price for new projects (notably BHP’s Jansen) but sufficient to ensure healthy margins for incumbents and support brownfield expansions. K+S‘ Bethune mine will be a big (and
underestimated) driver of value with and EV of about €3.3bn or €17/sh.

K+S‘ new segment realignment will help drive operational efficiencies and help investors evaluate the business by separating stable earnings from volatile. By combing the potash and salt businesses to form four customer-facing segments, K+S can (at a minimum) save commercial costs. Moreover, better earnings visibility from two stable segments (Consumer &
Industrial) and two volatile ones (Agriculture & Communities) could improve valuation.

Despite the company’s high leverage, their €1bn revolving credit facility provides downside protection. Assuming the current debt structure, Brazil’s price would have to drop sharply to $210/t for all of 2018-19 to exhaust their debt capacity. Plus, they could raise more in a pinch as debt markets have remained kind, e.g., they raised €400m at a 2.27% YTM in Q1:17.

Investment Implications
We upgrade K+S to Outperform with an updated price target of €28. Our target price increases primarily due to a higher Bethune valuation (higher capacity from Phase 3 and higher incentive price based on new analysis) and lower concern about the debt burden.

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Sven Kleinhans
Momentum Institutional GmbH


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