JBF Ind, Capacity scale up to unlock value :: Elara,

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JBF Industries: Capacity scale up to unlock value


Overseas outfit to rake in growth momentum
We believe that Ras-Al-Khaima (RAK), JBF’s overseas unit, which
contributed ~50% to its FY10 bottom-line, will be the key earnings
driver going forward. By FY11-end, RAK’s Polyethylene Terephthalate
(PET) chips capacity will be 468kt, in addition to the domestic PET
capacity of 144kt, putting JBF in the top ten global PET manufacturers.
RAK’s current Biaxially-oriented Polyethylene Terephthalate (BOPET)
films capacity is 66kt, which JBF plans to increase by 45% in FY12. This
capacity ramp-up of higher margin products in RAK is expected to
expand the blended group EBITDA margins by ~200bps by FY12
Secondly, the 50% rise in BOPET film realizations in the last six months
will be a direct flow through to the bottom-line (~USD40mn annually)
as the raw materials pricing has remained reasonably unchanged. The
supply constraints in the BOPET film industry are likely to persist thus
providing a strong pricing environment in the next12-18 months.
Overall capacity adds, cost efficiency to drive earnings growth
JBF’s current total capacity of 1.2MMT will be ramped up to ~1.4MMT,
driven by expansion in high margin product – PET chips and films. JBF
continues to enjoy its geographical cost advantages such as low
transportation and logistics costs and access to customer markets for
its domestic plants as well as its RAK plant in UAE. Additionally, the
company’s dominant position in the domestic market is likely to ensure
better pricing and higher operating rates for JBF. All these factors are
expected to drive significant earnings growth on a consolidated basis.
Global industry outlook: Pricing environment to be stable
Analyzing the demand-supply equation for JBF’s key raw materials,
Purified Terephthalic Acid (PTA) and Monoethylene Glycol (MEG), we
believe that the inputs prices are likely to be stable without any
substantial volatility in the medium term. Similarly, the demand-supply
equation for PET chips also seems be stable, asserting our expectations
of firm pricing and sustainable spreads for PET chips.
Valuation
Compared to JBF’s Asian peers, JBF comes across as a value pick
with the lowest valuations and highest return ratios in the region.
On an EV/EBITDA basis, the regional average is 9.3x, while JBF
trades at 3.2x. Similarly, on a P/E basis, JBF is trading at 4.4x, a huge
discount to regional peer average of 11.5x. On a P/B basis, the stock
trades at 1.1x, while the regional average is 1.7x, making JBF a
compelling case especially considering that its higher-than-peers
return ratios and dividend yield of ~3.1%. We value JBF with a
combination/average of two approaches: 1) Applying a
conservative 4.0x EV/EBITDA to Standalone as well as RAK 2)
Replacement cost method. By using an average we derive at our TP
of INR250/sh, implying an upside of 30% from current levels.