Grupo Azoty Puławy: another cheap Polish stock with a good quality business
Grupo Azoty Puławy (or Grupo Azoty Zakłady Azotowe Puławy SA, stock code ZAP in Poland) produces fertilizers and related chemicals in Poland. The company also produces gases such as liquid nitrogen and carbon dioxide. The company gets slightly about half of its revenue from exports.
In 2021 slightly more than half of the revenue is from the “Agro” segment. About 40% of the revenue is from the “Chemicals” segment. However in the third quarter of 2022 about 80% of the revenue was from the Agro segment.
In the first half of 2022 about 2/3 of the revenue was from Poland and the rest was mainly from other European countries.
When I looked into this stock in November 2022 the share price was 73.6 PLN. Now it is 82.8 PLN, with a market cap of about 366 million USD. In November 2022 this was an extremely good low EV/EBIT stock with good metrics for earnings quality, asset allocation and financial strength. Maybe because other stocks have gone up as well ZAP is still roughly as good as it was in November 2022. I mean on a statistical basis, compared to thousands of other stocks. Also stock price volatility is lower than average.
This company uses a lot of energy, including natural gas. The reason for the depressed stock price is an expected long period of high energy prices and reduced supply of natural gas. The company tries to make its chemicals segment less energy intensive, in particular less natural gas intensive.
The company produces its own electricity from coal. Depending on electricity prices the company also sells electricity. The company is doing several research projects, and seems to be successful in getting the results to production stage. Among others it is researching the production of bio-fertilizers, and also production of “slow-release fertilizers” allowing for less fertilizer usage.
Not only natural gas, phosphor and potash prices but also prices of fertilizer products have much increased from 2020 until now (November 2022). Indeed, profitability was much higher in the first 6 months and the second quarter of 2022 compared to 2021. However, ultimately price increases might not offset higher production costs from higher natural gas prices. From August until the end of October 2022 the company suspended certain production lines (melamine and caprolactam) citing decreased profitability.
Considering fertilizers are essential for food production I think chances are low a situation will develop where the company cannot profitably run its factories.
The company is somewhat more expensive than it seems because of the dividend payment after the reporting date (126 million PLN).
The balance sheet is strong with moderate leverage, a current ratio of 1.3 (1.25 after dividend payment) and much more cash than debts.
Substantial shareholders: Grupa Azoty Spółka Akcyjna 96.0%.
I have not looked at governance. I do not think there are any issues. Just look at the generous dividends, that I have not found any changes in the stake of the controlling shareholder and that I could not find issues when researching the stock before at the end of 2019.
Disclosure: long Grupo Azoty Puławy.
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