Geopolitical unrest clouds the outlook

The margin squeeze continued at Yara and remained stronger than anticipated by analysts (consensus – sales: -12.6%; EBITDA -37.0%; net income: -99%). Sales prices had fallen more strongly, not being offset by lower energy prices. The margin deterioration remained strong. The underlying agro fundamentals look positive, but the current geopolitical situation might weigh on the order pattern in Q4.

Strong margin squeeze in Q2

Yara’s profitability was between a rock and a hard place in the Q2. A significant fall in sales prices smashed profitability, which was not fully offset by lower energy prices. Volumes showed some recovery. This scenario had been broadly anticipated although its magnitude was far greater (miss to consensus -sales: -13.5%; Yara’s EBITDA: -56.9%; net result: loss of USD-298m vs: USD185m consensus estimate). The management indicated that the worst could be over. Curtailments have been lowered and

Lower prices make a dent in profitability

After skyrocketing profitability, Yara had to deal with a perfect set of opposite effects heavily weighing on profitability: sharply falling commodity prices, still curtailed production and inventory values based on high energy costs. Nevertheless, consensus was not met at many levels (revenues: -11.4%; adjusted EBITDA: -43.0%; operating income: -67.1%), which might not amuse investors. The Q2 could be somewhat better as the management flagged higher demand in Europe and lower natural gas cost

Greater profitability allows for better shareholder return

Yara’s Q4 figures were a mixed bag with the top line missing street expectations (-1.6%), but clearly beating consensus when it comes to adjusted EBITDA (+8.0%). The main drivers were higher prices due to the skyrocketing energy prices. On the other hand, high fertiliser prices have held back demand. The company will benefit from lower gas costs, which might be at the Q4 21 levels (pre-Ukraine-war levels), which should put pressure on sales prices, but not necessarily on margins.

Strong margins in a curtailed environment

Yara’s production volumes and deliveries suffered from the curtailed European production, but the extraordinary market situation still allowed for good margins albeit not extraordinary. The situation in the gas markets seems to have peaked as the company guidance is for lower, but still extremely high spot prices. Yara’s Q3 figures were a consensus-beating surprise (sales: +17.5%; adjusted EBITDA: +37.6%). Another positive catalyst is the lower-than- previously-anticipated gas costs (USD540m v

Still ahead of the cost curve

Yara reported consensus-beating Q2 sales (beat to consensus: +1.7%) and profitability figures (operating income: +9.5%). The strong profitability increase was mainly fostered by the higher sales prices as production volumes suffered from lower ammonia production. Once again, management guided for higher gas prices, based on the crucial assumption of if it is available, especially in Europe. Reported figures broadly confirmed our view on the company, but it is a bet on quite normal gas flows in

Positive sale price delta

Yara’s very profitable start came on the back of significant price increases, whereas sales volumes were subdued due to farmers’ reluctance to buy expensive fertilizer. The situation might have eased had Gazprom not announced that it was stopping gas transport to some European countries. This might additionally tighten the European nitrogen market helping Yara to cope with higher gas costs. The reported figures slightly missed consensus expectations for the top line (-1.2%), whereas operating

Turning the tide?

Yara’s FY figures were strong, but EBITDA followed the top line more distantly than expected (miss to consensus top line: -2.4%; EBITDA: -11%). EBITDA’s +26% increase was held back by skyrocketing gas prices as well as by higher impairments. On a quarterly adjusted basis, the picture looks more favourable as higher sales prices outweighed the extremely high energy costs in Q4. In our view, 2022 will be quite a profitable year despite the to-be-expected declining gas prices, if the Russia-Ukrai

Balancing lower ammonia production and high gas prices

Yara did better than the street had expected (top line: +5.1%; EBITDA: +2.5%), but that was the past. Central questions in today’s call were around the impact of the currently ongoing curtailment of its European production capacities and farmers’ willingness to accept continuously increasing prices. Management remained quite vague in this regard due to its conservatism, but clearly flagged that nitrogen is crucial for farmers to produce certain yields.

Food prices become a concern as gas prices soar

Yara and CF Industries, two leading ammonia producers, have announced they are to curtail quite a high share of their European production. This comes after the soaring gas prices, which can not be passed on to the farmers. The lower European production comes with the impact of Hurricane Ida. The heavy winds had caused severe damage and sudden shutdowns in the Mexican Gulf region, so the global supply balance has been hit. It looks to us as if this is becoming another perfect storm.

Strongly driven by higher prices

Yara reported a strong set of figures primarily driven by the implemented higher sales prices beating our cautious expectations, whereas consensus was more moderately beaten (top-line: 6; profitability: +2). In our view, the price increases overcompensated for the higher energy costs and weighed on volumes. However, the times of increasing prices is not over as management guides for higher forward prices until the year-end.

Energy prices start to be the expected pain

The world lusts for nitrogen-containing fertilisers as availability dominates pricing negotiations with ammonia prices flying up since the beginning of Q1. Being part of the story, Yara was one of the beneficiaries despite volume’s tiny performance. The higher sales prices could be introduced also because of the sharp (!) increase in natural gas prices yoy and sequentially. Our not too ambitious expectations were beaten, especially on the profitability level, but consensus was missed on all line

Going for green ammonia

Yara reported a good set of figures, beating our more moderate view in 2020 as we has factored in a stronger negative from higher energy prices. The latter has been counteracted by higher volumes and better pricing momentum in Q4. In the light of the fading effect from low energy prices, the provided outlook and already signed contracts will help profitability to be maintained in the first months of 2021, at a minimum. Consensus was not met.

Energy prices and FX headwind

Yara will release its Q4 results on 9 February, and we expect an EBITDA (Yara definition) of USD 495m (499). We have implemented firmer European gas prices and updated FX assumptions, representing headwind for earnings. This has been partly offset by higher price assumptions. Following our estimate revisions, we see limited scope for raising our NOK TP, and we hence downgrade the stock to Hold (Buy).

Headlines from ESG investor seminar

Targets new USD 300-600m EBITDA by 2025 2020-21 CapEx unchanged, 2022 higher than expected Unchanged financial targets Plans for 500’t green ammonia plant in Norway

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