Borealis – Credit Update

8 June 2012 Credit Research
Credit Flash - Borealis AG
solutions. The company is striving to move away from being a supplier of commodity
plastics, such as standard grade polyethylene and polypropylene, towards being a supplier of
plastic solutions, offering products that address global challenges in the field of mobility,
infrastructure and advanced packaging. Already around 60% of its products are considered
specialties, while around 40% are commodities. In close cooperation with its customers,
Borealis aims to improve the performance properties of its products through continuous focus
on research and development-based innovation. The group maintains several leading
proprietary technologies such as Borstar (for the production of polyethylene and
polypropylene). We note that Borealis has invested in research centers in the past (e.g.
research center in Austria; innovation center in Abu Dhabi for its Borouge JV) highlighting
their commitment to R&D.
Growth strategy Borealis' growth strategy is mainly centered on organic growth through selected
acquisitions. While current investment projects include a new catalyst plant in Austria (using
Borealis proprietary production technology Sirius), according to management there are no
significant capex projects in the pipeline. In that respect, we note that there is no update on
the group's involvement in the multi-billion dollar base chemicals project in Uzbekistan or in
Chemaweyaat (Abu Dhabi), which have been discussed in the past. On average, annual
capex spending over the last three years was in line with depreciation levels (FY11: 1.0x
capex/D&A), which is a good proxy for future capex spending (annual maintenance capex are
around EUR 200mn). We note that Borealis is constantly monitoring its asset base in order to
improve the cost competitiveness of its European production assets. In FY11, this has
resulted in the closure of two melamine plants.
In terms of external growth, to date Borealis has focused on contributions to its Borouge JV
(for capacity expansion), while carrying out medium-sized acquisitions. Regarding the latter,
we highlight the group's acquisition of fertilizer producer PEC-Rhin in November 2011.
Looking ahead, we expect small-to-medium-sized acquisitions. This does not include a
potential purchase of a minority stake in NOVA Chemicals (please see above).
Financial targets The main financial targets of the group are the gearing ratio and ROCE. Owing to the
sensitivity of the petrochemical industry to economic cycles, management considers a target
gearing ratio of between 40% and 60%. At FYE 2011, this ratio was at 35% (vs. 37% at FYE
2010) and thereby at the lower end of the group's target range. Another key performance
indicator is average return on capital employed (ROCE) for which Borealis targets a level of
above 11%. Following a couple of years of coming in below this target, Borealis achieved a
level of 13% in FY11.
Dividend policy Borealis does not have a formal dividend policy in place. Dividends to its shareholders
fluctuated in the past (i.e. no dividend payouts in FY09 and FY10), but were in the area of
EUR 100-110mn in FY11 and FY12.
Financial Profile
Latest results With 2011 marked by a volatile market environment, Borealis' FY11 results were solid.
While 1H11 was characterized by solid demand levels with strong pressure on input costs,
conditions in 2H11 deteriorated. FY11 sales of EUR 7.1bn were up by 13% mostly due to
higher prices with largely flat volumes (e.g. Polyolefins volumes up by 0.4% yoy). Due to
strongly rising feedstock costs (+17% yoy), operating profit declined by 18% yoy to EUR
285mn. In the first full year of production, Borouge was the main driver of the strong increase
in the share of income from associates (to EUR 333mn vs. EUR 120mn in FY10), which is not
included in the calculation of operating profit. In terms of cash generation, Borealis posted
negative free cash flow (after capex and dividends) of EUR -141mn due to a step up in capex
(EUR 282mn vs. EUR 136mn in the prior year), dividends (EUR 101mn vs. no payout in
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