With this report we downgrade Acron from Buy to HOLD on valuation grounds. We believe that Acron’s rouble bonds (yielding 8.32%) currently offer better exposure than its shares to the company in the mid-term.
Stellar share price performance. Since the beginning of 4Q11, Acron’s share price has appreciated nearly 40%, beating both MSCI Russia (up 20% in the period) and the RTS (up 15%). We recall that the August-September decline on the Russian stock market wiped out half of Acron’s capitalisation, turning it into the cheapest fertiliser producer among its peers. We believe this undervaluation as well as certain corporate events triggered the company’s stellar share price performance.
But not so cheap anymore. After its recent rally Acron does not look as strikingly cheap vs its peers as it now trades at a 2012E P/E of 7.0x vs the peer average of 8.3x. Moreover, if PotashCorp is excluded from the sample, Acron’s forward ratios would imply only a very narrow discount despite its inferior stock liquidity and limited free float.
The outlook does not appear promising. With short-term triggers all but exhausted, we believe that Acron’s share price is facing a period of weakness. We note that nitrogen fertiliser prices have already started to show signs of fatigue while major news on the corporate front has already been priced in, in our view.
Rating downgraded to HOLD. With the company’s share price setting fresh 52-week highs it now trades near our estimated 12M target price. While we slightly increase our 12M target price for Acron from $46.4/share to $47.9/share to reflect recent corporate developments, we cut our rating from Buy to HOLD as our new target price implies potential upside of only 3%.
Where to look? We note that Acron presents a well-balanced combination of an experienced management team and a stable business model which over time (and with a certain amount of effort) could turn the company into a vertically integrated holding. However, in an environment of equity market volatility, we believe that Acron’s rouble-denominated bonds are worth examining.
In debt we trust. Of its tradable debt, Acron’s second issue is the most liquid, according to Aton’s fixed income team. At current price levels, the bond yields 8.32% with a duration of 1.5 years. Acron-2 is included in the Central Bank of Russia’s Lombard list and MICEX’s A1 list. The latter factor makes the bond investable for insurance and pension funds. All in all, its short duration and decent spread to OFZ of 123 bpts suggest that Acron-2 provides far better exposure to the company in the mid-term than the shares, in our view.
Back
