cfa institute research challenge 2016 prague, 3/2/2016 ... files/cfa...discounted cash flow company...

CFA Institute Research Challenge 2016 Prague, 3/2/2016

Unipetrol: From Ashes Like a Phoenix!

Team D Ondřej, Pavel, Robert K., Robert Š., Tomáš

Executive Summary

Company Overview Industry &

Competitors

Investment

Case

Financial

Analysis Valuation Conclusion Risks

Target Price:

206 CZK

Upside: 29%

BUY

Recommendation

Main features

Largest downstream group in CZ

Operator of 339 fuel stations in CZ

Part of PKN Orlen (63%)

110

130

150

170

190

210

230

in

CZ

K p

er

share

Price Target CZK 206

as of 17/12/2016

Market Price CZK 160

as of 17/12/2015

Market Cap CZK 29.0bn

EBIT CZK 8.5bn

Net Cash CZK 6.8bn

52-week price range CZK 119 – 195

Average daily volume CZK 10.8m

Free float 15%

Company profile

Current Price:

160 CZK

Refining


Competitors

Investment

Case

Financial


Business Description

Downstream Retail

PetChem

Filling stations network

Refining


Competitors

Investment

Case

Financial


Downstream Retail

PetChem

Filling stations network

Business Description

Financials Breakdown


Competitors

Investment

Case

Financial


70%

11%

2%

8%

9% Poland

Czech Republic

Germany

Slovakia Other

0.2bn

62bn

8.1bn

30bn

0.3bn

9bn

0% 20% 40% 60% 80% 100%

EBIT

Revenues

Refining Petrochemistry Retail

Revenues by country 2015E Revenues and EBIT (CZK)

Industry Overview

& Competitive Positioning

Industry & Competitors


Competitors

Investment

Case

Financial


Steam cracker ethylene

production in kt

Unipetrol operations

PKN ORLEN

700,000

OMV AG

450,000

PKN ORLEN

544,000

Dow Chemical Co.

560,000

OMV AG

500,000

MOL Group

220,000

MOL Group

660,000

TOTAL GERMANY

5,757,265

TOTAL NETHERLANDS

3,965,000

TOTAL BELGIUM

2,460,000

Shell

560,000

Investment Summary

Investment Summary


Competitors

Investment

Case

Financial


crude oil represents

62% of total

costs

Key drivers:

1. Crude oil price

2. Steam cracker overreaction

3. Modernization and M&A

4. Macro environment

0

20

40

60

80

100

120

140

Investment Summary


Competitors

Investment

Case

Financial


OPEC defends

market share

oversupply

2m bbl/day

Key drivers:

1. Crude oil price




Brent crude oil price (USD/bbl)

Investment Summary


Competitors

Investment

Case

Financial


0

20

40

60

80

100

120

2008 2010 2012 2014 2016E 2018E

-47%

Key drivers:

1. Crude oil price




Avg. annual oil price forecast (USD/bbl)

Investment Summary


Competitors

Investment

Case

Financial


-4%

-2%

0%

2%

4%

6%

8%

10%

0

20

40

60

80

100

120

2008 2010 2012 2014 2016E 2018E

PE3 unit increases

EBIT margin

Key drivers:

1. Crude oil price




Avg. annual oil price vs. EBIT margin

Investment Summary


Competitors

Investment

Case

Financial


CZK

Damage & lost profit 14bn

Unrecoverable cost:

Management expectation 2bn

Market reaction 7bn

Our estimation 6bn

Key drivers:

1. Crude oil price




August 2015 – steam cracker caught on fire

October 2016 – fully operational

Steam cracker accident

CZK 1bn

upside

Investment Summary


Competitors

Investment

Case

Financial


4.45

mt/y 8.7 mt/y +95%

Refining capacity

2013

2016

Key drivers:

1. Crude oil price




100% stake in Česká rafinérská (April 2015)

68 OMV stations (reaching 20% share in retail)

M&A activities

Investment Summary


Competitors

Investment

Case

Financial


New polyethylene (PE) unit

Large investment project (CZK 8.5bn)

320

kt/y 470 kt/y +47%

Polyethylene units capacity

2017

2019

Key drivers:

1. Crude oil price




PE3 Investment

Investment Summary


Competitors

Investment

Case

Financial


2,0%

3,9%

2,6% 2,6%

2,2% 2,2% 2,2%

0,9%

1,5% 1,6% 1,7% 1,6% 1,6% 1,6%

2014 2015E 2016E 2017E 2018E 2019E 2020E

Czech Rep. EU 15

Key drivers:

1. Crude oil price




GDP Growth

Financial Analysis

Profitability Analysis


Competitors

Investment

Case

Financial


PE3 → ↑ efficiency

↑ oil price

Steam cracker & Margin rationalization

EBIT margin

2011 – 2014 -0.3%

2015 9.5%

2020E 2.2%

EBIT margin Unipetrol vs. peers

-4,0%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Unipetrol Peers median Peers LT avg.

CAPEX and Dividend Potential


Competitors

Investment

Case

Financial


Cumulative FCF 2016 – 2020 (CZK bn)

12.5

Accum.

Cash

2020E

Change

in NWC

0.4

Retail

EBIT

2.2

Petchem

EBIT

13.6

Net cash

2015E

3.7

CAPEX

22.0

Deprec.

15.1

Refining

EBIT

Income

tax &

Non core

0.0

6.8

Valuation

50%


Competitors

Investment

Case

Financial


?

50%

?

Discounted cash flow model

10-year forecast

EBIT estimated by segments

Adjustments for CAPEX, Depreciation, and NWC

Peer group valuation

Valuation

Discounted Cash Flow


Competitors

Investment

Case

Financial


2014 2015 2016E 2017E 2018E 2019E 2020E

Crude Oil price (USD/bbl) 99.0 52.5 48.5 47.3 50.0 52.0 56.0

EBIT margin 2.1% 9.5% 4.5% 2.7% 2.9% 3.5% 2.5%

WACC calculation

Risk-free rate 2.7%

Beta 0.76

Risk premium 3.9%

Size premium 2.2%

Cost of Equity 8.8%

Cost of Debt 2.6%

Equity weight 63%

Debt weight 37%

WACC 6.3%

0,0

0,5

1,0

1,5

2,0

2,5

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Free cash flow (CZK bn)

50%

Valuation


Competitors

Investment

Case

Financial


194

CZK

50%

?

Discounted cash flow model

Peer group valuation

13 European downstream companies

EV/Sales valuation

EV/EBITDA inappropriate multiple – volatility


Competitors

Investment

Case

Financial


EV/Sales

Historical discount -6%

LTM discount 48%

EV/Sales Unipetrol vs. peers median

Multiples Pricing

0,10

0,15

0,20

0,25

0,30

0,35

0,40

0,45

2011 2012 2013 2014 LTM

EV/Sales Unipetrol EV/Sales peers

Multiples Pricing


Competitors

Investment

Case

Financial


37 278

30 478

36 3306 8005 852

Net cash Steam

Cracker

Enterprise

value unadj.

EV adjusted Equity value

219 CZK

0.41x

LTM EV/Sales peers median

Target Price


Competitors

Investment

Case

Financial


DCF Analysis

50%

194

CZK

50%

Multiples

219

CZK

206 CZK

12-month target price

Upside: 29%

Risk Analysis

Risk Matrix


Competitors

Investment

Case

Financial


Polish

Elections

Regulatory

Environment

Long-term

Competitiveness

FX Risk

Steam

Cracker

Shutdown

Crude Oil

Price

Labour Union Russia/Ukraine

Conflict Macro

LOW MEDIUM HIGH

LO

W

MED

IUM

HIG

H

Impact

Pro

bab

ilit

y

Main Risk: Steam Cracker Shutdown


Competitors

Investment

Case

Financial


0%

20%

40%

60%

80%

100%

4Q14 2Q15 4Q15 2Q16 4Q16

Steam cracker shutdown

Postponed reconstruction

Full coverage expected by management

Additional potential upside

Planned steam cracker utilization

Main Risks: Oil Price


Competitors

Investment

Case

Financial


Positive risks Negative risks

China slowdown

Iran comeback

US storage capacity utilized

Curtailing production in the US

US-RUS-OPEC agreement

Geopolitical risks

Main Risks: Corporate Risk


Competitors

Investment

Case

Financial


Shareholder structure

63%

24%

13%

J&T Group

Others

PKN Orlen

Polish elections

Changes in PKN long-term strategy

New management

J&T Group

Activist shareholder

Pressure on dividend payout

Conclusion

Recommendation


Competitors

Investment

Case

Financial


BUY

1. Low crude oil prices




Appendix

Contents:

Stock Price Development

Company Structure

Map of Distribution System

SWOT Analysis

Porter 5 Forces

Oil Supply & Demand Factors

Steam Cracker Accident

Refining Utilization Ratio

Refining and PE Capacity

Refining Shutdowns

Number of Fuel Stations

ROIC Decomposition

Beta Calculation

DCF Model

Comparables List

Comparable Companies

Multiples Valuation

EV/EBITDA

Sensitivity Analysis

Risk Matrix

Appendix: Stock Price Development


Competitors

Investment

Case

Financial


0

100

200

300

400

500

600

700

90

110

130

150

170

190

Trade volume in CZK million CZK per share

UREA unit shutdown

Acquisition of 16.335% share

in Česká rafinérská from Shell

Acquisition of 32.445% share in

Česká rafinérská from Eni

Steam Cracker Accident

Crude Oil Price Slump

J&T Bank ceases acquiring

shares of Unipetrol

Unipetrol stock price (CZK) and daily volumes (CZK m)

Back to contents

Appendix: Company Structure


Competitors

Investment

Case

Financial


Unipetrol, a.s.

Retail

Benzina

Downstream

Česká

rafinérská

Unipetrol

RPA

Paramo

Unipetrol

Deutschland

Unipetrol

Slovensko

Unipetrol

Hungary

R&D Logistics

Petrotrans

Unipetrol

Doprava

Service

Center

Company structure

Back to contents

Appendix: Map of Distribution System


Competitors

Investment

Case

Financial


Distribution system in CZ and SK

Back to contents

Appendix: SWOT Analysis


Competitors

Investment

Case

Financial


Strenghts Weaknesses

Česká rafinérská shares purchase Disabled PetChem Production

Leveraging on retail market position New Polish Government Changes

Refining Monopoly in CR Low Competitiveness

High Refining & PetChem Margins

Record GDP Growth

Low Crude Oil Price

Strong US Dollar

Opportunities Threats

PE3 Investment Project MOL Group influence Growth

Low Crude Oil Forecast New Gulf and US refineries

Strengthening Export

Further CNB Interventions

Divident Payout

SWOT analysis

Back to contents

Appendix: Porter 5 Forces


Competitors

Investment

Case

Financial


0

1

2

3

4

5

Threat of New

Entrants

Threat of

Substitute

Products or

Services

Bargaining

Power of

Customers

Bargaining

Power of

Suppliers

Intensity of

Competitive

Rivalry

0 No threat to the business

1 Insignificant threat to the business

2 Low threat to the business

3 Moderate threat to the business

4 Significant threat to the business

5 High threat to the business

Porter five forces analysis

Back to contents

Appendix: Oil Supply & Demand Factors


Competitors

Investment

Case

Financial


Proven Oil Reserves 2014 Proven Oil Reserves (m bbl) Total Cost of Oil Production (USD/bbl) Marginal Cost of Production

(USD/bbl)

North America 40 681 39 80

Latin America 342 235 25 20

Eastern Europe and Eurasia 119 863 22 45

Western Europe 11 577 52 105

Middle East 802 518 10 7

Africa 127 561 26 19

Asia and Pacific 48 445 29 N/A

Total 1 492 880 18 17

OPEC 1 206 004 14 11

OPEC % 81% 24% 34%

90

91

92

93

94

95

96

97

2014 2015 2016

Total Demand Total Supply

Supply & demand drivers

1. OPEC production + 5.7% over official quotas

2. Iran easement + 600 k bbl/day + 30 m bbl stored

in tankers

3. Historical highs of Iraq production

4. High utilization of US storage capacities

5. Oil demand slowdown driven by lower GDP

growth of China (6% 2016 vs. 6.8% 2015)

2 mln bbl 1 mln bbl

Avg. daily supply/demand (m bbl)

Back to contents

Appendix: Steam Cracker Accident


Competitors

Investment

Case

Financial


Steam cracker accident direct costs and insurance (mil. CZK)

Cost by type Total cost

Mngmt.

expected

recovery in %

Management

expected loss

Our expected

recovery

Our expected

loss

Cost of repair 4 100 100%

- 100%

-

Lost profit 3Q 2015 1 600 0% 1 600 0% 1 600

Lost profit 4Q 2015 480 0% 480 0% 480

Lost profit 4Q 2015 2 400 100%

- 50% 1 200

Lost profit 1Q 2016 2 189 100%

- 50% 1 094

Lost profit 2Q 2016 2 189 100%

- 50% 1 094

Lost profit 3Q 2016 766 100%

- 50% 383

Total cost 13 724 2 080 5 852

Back to contents

Appendix: Refining Utilization Ratio


Competitors

Investment

Case

Financial


77%

82% 82%

88%

72%

87% 87% 87% 86%

85%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Refining utilization ratio

Back to contents

Appendix: Refining and PE Capacity


Competitors

Investment

Case

Financial


0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

2013 2014 2015 2016 2017 2018 2019 2020

refining

PE

Refining and PE capacity development

Back to contents

Appendix: Refining Shutdowns


Competitors

Investment

Case

Financial


0

1

2

3

4

5

6

7

8

9

10

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

2017 and 2019 planned periodical shutdowns (ths. kt)

Back to contents

Appendix: Number of Fuel Stations


Competitors

Investment

Case

Financial


339 316

215 190 173

68

Benzina MOL OMV EuroOil Shell

Number of filling stations in 2015

Selected Chains

Back to contents

Appendix: ROIC Decomposition


Competitors

Investment

Case

Financial


Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 2.97 3.65 3.36 4.00 4.50

Peers med. 3.30 3.31 3.49 4.00 2.66

Invested capital turnover

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 29.28 23.63 19.06 12.21 18.94

Peers med. 15.80 19.03 16.89 11.44 19.98

ST part of Invested capital turnover

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 3.30 4.32 4.08 5.94 5.90

Peers med. 3.99 3.77 3.93 2.94 2.69

LT part of Invested capital turnover

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol -1.2% -0.1% -0.7% 1.7% 6.8%

Peers med. 2.5% 1.8% 0.5% 0.3% 3.6%

PM (After tax)

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol -3.6% -0.2% -2.3% 6.8% 30.4%

Peers med. 8.6% 6.7% 1.7% 1.5% 12.3%

ROIC

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 5.5% 5.5% 4.7% 6.6% 13.1%

Peers med. 8.7% 7.8% 6.4% 3.7% 8.2%

Gross margin

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 3.8% 3.0% 3.2% 2.7% 3.0%

Peers med. 3.9% 4.2% 3.8% 3.9% 5.1%

SG&A, distribution expenses and others/Sales

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 3.2% 2.6% 2.4% 1.8% 1.7%

Peers med. 1.9% 1.8% 1.9% 2.2% 2.5%

Depreciation/Sales

Back to contents

Appendix: Beta Calculation


Competitors

Investment

Case

Financial


Levered Beta Leverage

Unlevered

Beta

Beta

relevered

Beta with

shrinkage

Ticker FY2011 FY2012 FY2013 FY2014 LTM FY2011 FY2012 FY2013 FY2014 LTM

Averag

e LTM LTM LTM

PKN 0,90 0,87 0,96 0,62 0,49 93% 43% 43% 51% 38% 54% 0,34 0,63 0,75

NESTE 1,07 1,17 1,58 1,40 1,20 119% 93% 48% 36% 29% 65% 0,78 0,67 0,78

MOL 1,20 1,19 0,98 0,59 0,63 58% 51% 51% 64% 30% 51% 0,44 0,62 0,75

Saras 1,21 1,34 1,06 0,90 1,01 58% 49% 55% 74% 29% 53% 0,71 0,63 0,75

Hellenic Pet. 0,72 0,70 0,48 0,62 0,39 59% 18% 63% 160% 180% 96% 0,22 0,78 0,86

Lotos 1,13 1,09 0,93 0,64 0,43 251% 123% 135% 139% 127% 155% 0,19 0,99 1,00

Motor Oil Hellas Lvol. Lvol. Lvol. Lvol. Lvol. 199% 129% 115% 166% 122% 146% Lvol. 0,96 0,98

Slovnaft Lvol. Lvol. Lvol. Lvol. Lvol. 13% 38% 22% 35% 16% 25% Lvol. 0,53 0,69

NIS Lvol. Lvol. Lvol. Lvol. Lvol. 38% 31% 59% 79% 109% 63% Lvol. 0,67 0,78

Esso Francaise 1,11 1,13 1,07 1,01 0,92 15% 21% 63% 89% 0% 38% 0,70 0,58 0,72

Paz Oil 0,78 0,78 0,70 0,52 0,62 122% 108% 109% 80% 59% 95% 0,35 0,78 0,85

Oil Refineries NA 0,89 0,82 0,84 0,96 130% 139% 170% 189% 112% 148% 0,44 0,97 0,98

TUPRAS 1,16 1,25 1,02 1,16 1,09 14% 29% 52% 55% 57% 41% 0,82 0,59 0,72

Unipetrol Lvol. Lvol. Lvol. Lvol. Lvol. 8% 9% 9% 20% 0% 9% Lvol. 0,65 0,77

1st quartile 84% 85% 79% 61% 48% 15% 27% 46% 48% 25% 40% 0,31 0,31 0,31

Median 111% 111% 97% 74% 77% 58% 46% 57% 76% 47% 58% 0,44 0,66 0,77

3rd quartile 118% 121% 106% 105% 103% 124% 111% 110% 144% 115% 109% 0,72 0,83 0,86

Back to contents

DCF (CZK m) 4Q15E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

EBIT 111 3,291 2,636 3,031 3,644 2,901 2,849 2,794 2,753 2,718

Tax rate 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%

NOPAT 90 2,666 2,135 2,455 2,951 2,349 2,349 2,263 2,230 2,202

Depreciation 780 2,620 2,881 3,114 3,211 3,298 3,298 3,443 3,504 3,559

Capex/Divestitures -3,973 -5,000 -5,000 -4,000 -4,000 -4,000 -4,000 -4,000 -4,000 -4,000

Change in NWC 3,116 953 -16 -443 5 -455 -455 -163 -17 -17

Free Cash Flow 13 1,239 1 1,126 2,167 1,192 1,192 1,543 1,718 1,744

WACC 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34%

Discount factor 0.98 0.93 0.87 0.82 0.77 0.72 0.68 0.64 0.60 0.57

NPV of FCF 12 1,147 1 922 1,669 864 812 988 1,035 988

Sum of NPV of FCF 8,311 2016E 2017E 2018E 2019E 2020E

Terminal value growth 1% NOPAT 2,689 2,158 2,478 2,972 2,369

Term value at 1% growth 32,989

Terminal value PV 18,405

Enterprise Value 26,716 -3973

Net cash/(Net Debt) 6,800 705900000

0

Fair value 33,516 5500 5.5248618

8

Shares outstanding (m) 181

Present value 182.0

Upside 13%

Price Target 193.6

Upside 20%

Back to contents

Appendix: Comparables List


Competitors

Investment

Case

Financial


Ticker Company Refining&

Petchem

Retail/

Trading others Markets

PKN.WA PKN Orlen 74.48% 25.29% 0.23% Germany and Central Europe

NESTE.HE Neste Oil 63.23% 24.06% 12.71% Baltic sea region

MOLB.BU MOL Plc 70.17% 16.25% 13.59% Eastern Europe and UK

SRS.MI SARAS group 74.67% 21.05% 4.28% Italy, Spain

ELPE.AT Hellenic

Petroleum 73.79% 25.99% 0.22% South Eastern europe

LTSP.WA Grupa Lotos 96.79% 0.00% 3.19% Poland and surrounding

MOH.AT Motor Oil Hellas

Group 73.96% 26.04% 0.00% Greece and South eastern europe

SLV.BE SLOVNAFT 98.39% 10.56% -8.95% Central Europe, Germany and Austria

NIIS.BEL NIS ad Novi Sad 75.29% 0.00% 24.71% South east Europe

ESSF.PA Esso Francaise

SA NA NA NA France

PZOL.TA Paz Oil Company

Ltd 57.75% 42.25% 0.00% Israel

ORL.TA Oil Refineries Ltd 100.00% 0.00% 0.00% Israel

TUPRS.IS TUPRAS 100.00% 0.00% 0.00% Turkey

UNPE.PR Unipetrol 91.00% 9.00% 0.00% Czech Republic and central europe

Back to contents

Appendix: Comparable Companies


Competitors

Investment

Case

Financial


4

10 11

6

8 6 7 5

-1

9 4 2

14

2

0

3

3

7

0

1

19

5

1

Unipetrol

Esso Francaise

Paz Oil

Hellenic Pet.

TUPRAS

Lotos

Oil Refineries

ICTO

NIS Slovnaft

Saras

Motor Oil Hellas

PM

PKN

NESTE

MOL

Size: 5 000

Comparable companies PM, ICTO sized by sales (EUR m)

Back to contents

Appendix: Multiples Valuation


Competitors

Investment

Case

Financial


0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TUPRAS

Oil Refineries

Paz Oil

Esso Francaise EV/EBITDA

NIS

Slovnaft Motor Oil Hellas

Unipetrol

EV/Sales

Lotos Hellenic Pet.

Saras

MOL

NESTE

PKN

Equity value

Multiple used LTM

EV/Sales 37 278

MV/BV 36 939

EV/EBITDA 65 363

Comparison of peers multiples in 2015

Back to contents

Appendix: EV/EBITDA


Competitors

Investment

Case

Financial


-

5

10

15

20

25

2 011 2 011 2 012 2 012 2 013 2 013 2 014 2 014 2 015 2 015

EV/EBITDA Unipetrol vs. peers median

EV/EBITDA Unipetrol EV/EBITDA peers

Back to contents

Appendix: Sensitivity Analysis


Competitors

Investment

Case

Financial


WACC

term

inal

gro

wth

205.8 5.3% 5.6% 5.8% 6.1% 6.3% 6.6% 6.8% 7.1% 7.3%

-2% 194 191 189 187 185 183 182 180 178

-1% 201 198 195 193 190 188 186 184 182

0% 211 207 203 200 197 194 191 189 187

1% 225 219 214 210 206 202 199 196 193

2% 248 239 231 225 219 214 209 205 201

3% 290 274 261 250 240 232 225 219 214

4% 395 352 321 298 280 265 252 242 234

Price target sensitivity to terminal growth and WACC

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cfa institute research challenge 2016 prague, 3/2/2016 ... files/cfa...discounted cash flow company...

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