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20 Oct 2023
Volumes drive Q3 EBITDA miss
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Volumes drive Q3 EBITDA miss
- Published:
20 Oct 2023 -
Author:
Favre Laurent LF | Patel Rikin RP -
Pages:
9
Q3 miss driven by volumes and softer mix
Yara reported Q3 EBITDA of $396M, c35% below consensus expectations. This represented the company''s third consecutive earnings miss this year. Unlike previous quarters, underperformance was driven by volume / mix rather than inventory write downs. Price and energy cost deltas were largely in line, though nitrate realizations continued to lag benchmarks. FCF was strong, driven by a substantial working capital release. Management also cut its capex guide for FY23 from c$1.7 to $1.3-1.4bn.
Volumes becoming a cause for concern
While deliveries may have increased 15% y/y, operating leverage was much lower than we had anticipated. We think this is largely due to mix with European volumes (which are higher margin) up by less vs other regions. However, it is now hard to deny that Yara may be facing structural challenges in Europe from market share losses and lower nitrogen application. Despite operating rates back to a normalised level, Q3 deliveries remained 10% below long-term averages.
The dividend dilemma will now be in focus
Yara is facing a number of challenges. The nitrogen fertiliser market has normalised following an unprecedented up cycle between 2020-22. At the same time, Yara may face substantially higher capex if it chooses to deploy capital towards two clean ammonia projects in the US. Furthermore, changes to the EU ETS may create another longer term headwind for Yara (see CHEMICALS: Chemicals and ESG: From beakers to a better world?). As such we see net debt / EBITDA climbing to 2x by FY24 and are c50% below consensus on average for FY23 and 24 DPS.
Estimates changes; retain Underperform
We lower our FY23/ 24 EBITDA estimates by c10%. Our price target falls to NOK330 (previously NOK350). At 8x FY24 EV/EBITDA, we think the shares are expensive especially with increasing risk to the dividend. We reiterate our Underperform rating.