Polish Strategy - PBG SA

Polish Strategy KGHM July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F13 August 2010 3Q10 resultsAugust 2010Likely Abacus deal closure3Q10Likely guidance revision10 November 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)State Treasury 31.8Source: Company data, INGShare dataAvg daily volume (3-mth) 961,157Free float (%) 3,280Market cap (PLNm) 18,840.0Net debt (1F, PLNm) (3,182)Enterprise value (1F, PLNm) 15,658Dividend yield (1F, %) 12.7Source: Company data, ING estimatesShare price performance12011511010510095908580Source: ING7/09 9/09 11/09 1/10 3/10 5/10PriceCompany profileWIG20 (rebased)KGHM was the ninth-largest producer of copper andthird-largest producer of silver in the world in 2009,producing 503,000 tonnes of copper and 1,203 tonnesof silver. KGHM owns its own copper ore deposit andintegrated production structure, comprising threemines, two copper smelters and a wire rod plant.KGHM owns a 100% stake in Dialog, the third-largestfixed telephony company in Poland, and a 24% stakein Polkomtel, the country’s second-largest mobileoperator.RisksWe note an increased risk of KGHM distributing lowerdividends in the future. We currently forecast a 60%dividend pay-out ratio starting from 2010F earnings tobe distributed in 2011F, which could be adverselyimpacted if KGHM were to increase further its M&Aactivity in either the core business of copper mining orthe non-core power generation segment.Income statementRevenues 12,183 11,303 11,061 14,291 14,938 14,382EBITDA 5,175 3,787 3,759 5,434 6,313 5,679EBIT 4,756 3,305 3,212 4,854 5,644 4,911Net interest 377 322 506 304 399 467Associates 0 0 0 0 0 0Other pre-tax items (478) (74) (650) (245) 0 0Pre-tax profit 4,655 3,554 3,067 4,912 6,044 5,378Tax (857) (633) (526) (933) (1,148) (1,022)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 3,799 2,920 2,541 3,979 4,895 4,356Normalised net profit 3,799 2,920 2,541 3,979 4,895 4,356Balance sheetTangible fixed assets 4,833 5,538 5,938 6,943 8,270 9,538Intangible fixed assets 75 81 76 93 90 91Other non-current assets 2,480 3,108 3,496 3,496 3,496 3,496Cash & equivalents 2,616 2,505 1,238 3,199 4,301 4,517Other current assets 2,375 2,669 3,205 4,016 4,040 3,988Total assets 12,380 13,900 13,953 17,747 20,197 21,630Short-term debt 9 7 6 6 0 0Other current liabilities 1,966 1,661 1,839 2,254 2,203 2,216Long-term debt 20 17 12 12 12 12Other long-term liabilities 1,419 1,623 1,693 1,693 1,693 1,693Total equity 8,966 10,591 10,404 13,782 16,290 17,709Total liabilities & equity 12,380 13,900 13,953 17,747 20,197 21,630Net working capital 908 1,193 1,829 2,329 2,391 2,329Net debt (cash) (2,588) (2,480) (1,221) (3,182) (4,290) (4,505)Cash flowCash flow EBITDA 3,799 2,920 2,541 3,979 4,895 4,356Tax, interest & other 0 0 0 0 0 0Change in working capital 177 (934) (113) (396) (75) 66Net cash from op activities 3,976 1,986 2,428 3,583 4,820 4,422Capex (873) (1,192) (942) (1,602) (1,993) (2,037)Net acquisitions 0 0 0 0 0 0Net financing cash flow 227 664 (544) 23 279 308Dividends & minority distrib'n (3,394) (1,800) (2,336) (601) (2,387) (2,937)Net ch in cash & equivalents 442 (741) (818) 1,961 1,103 217FCF 3,103 794 1,486 1,981 2,827 2,384Performance & returnsRevenue growth (%) 4.4 -7.2 -2.1 29.2 4.5 -3.7Normalised EPS growth (%) 5.4 -23.1 -13.0 56.6 23.0 -11.0Normalised EBITDA mgn (%) 42.5 33.5 34.0 38.0 42.3 39.5Normalised EBIT margin (%) 39.0 29.2 29.0 34.0 37.8 34.1ROACE (%) 55.5 33.7 30.5 40.1 37.5 28.9Reported ROE (%) 44.5 29.9 24.2 32.9 32.6 25.6Working capital as % of sales 7.5 10.6 16.5 16.3 16.0 16.2Net debt (cash)/EBITDA (x) (0.50) (0.66) (0.32) (0.59) (0.68) (0.79)EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 1.3 1.4 1.6 1.1 0.97 1.00EV/normalised EBITDA (x) 3.1 4.3 4.7 2.9 2.3 2.5EV/normalised EBIT (x) 3.4 4.9 5.5 3.2 2.6 2.9Normalised PER (x) 5.0 6.5 7.4 4.7 3.8 4.3Price/book (x) 2.1 1.8 1.8 1.4 1.2 1.1Dividend yield (%) 9.6 12.4 3.2 12.7 15.6 13.9FCF yield (%) 19.1 4.9 8.4 12.7 19.4 16.6Per share dataReported EPS (PLN) 18.99 14.60 12.70 19.90 24.48 21.78Normalised EPS (PLN) 18.99 14.60 12.70 19.90 24.48 21.78Dividend per share (PLN) 9.00 11.68 3.00 11.94 14.69 13.07Equity FCFPS (PLN) 15.51 3.97 7.43 9.91 14.14 11.92BV/share (PLN) 44.83 52.96 52.02 68.91 81.45 88.55Source: Company data, ING estimates43