ANALYST VIEW - Deutsche Bank ups target price for Hungary's MOL

http://www.portfolio.hu/en/cikkek.td...

Wednesday, March 25, 2009 10:06:00 AM

Deutsche Bank has on Wednesday upped its target price for Hungarian fuels group MOL to HUF 17,500 from HUF 13,000, saying the stock was its only recommended exposure in to the sector. DB has maintained its ‘Buy' rating on MOL.

“We believe the current bear market rally has created attractive investment opportunities," analyst Gergely Várkonyi said. He recommends to take profits in PKN, PGNiG and Lotos (all rated a ‘Sell') while he continue to recommend MOL, which has been left out of the rally, as “the only exposure to the CEE oil & gas sector."

Várkonyi likes MOL MOL because, unlike its Polish peers
- “it trades at a significant valuation discount to EMEA/GEM peers,
- it is projected to have a resilient financial performance
- it has upside risk in consensus,
- its balance sheet risk is overestimated and
- it has a growth driver from the INA buy."

The analyst said Deutsche Bank's CEE oil & gas universe is expected to face “significant industry headwinds this year" but against this bearish backdrop, he expects MOL to have “the most resilient financial performance, thanks among others to its diversified, high-quality asset base."

Upstream challenges are straightforward but Várkonyi noted MOL's resilience thanks to the high royalty paid and exposure to gas.

“In refining, diesel cracks have finally succumbed to soft demand, although this was offset by improving gasoline and fuel oil cracks. This said, we still expect average cracks to more than half this year."

While the analyst admitted the positive effect of the strong dollar vs. local currencies for MOL, PKN and Lotos, he noted that this is hedged to a no small extent through FX debt and capex.

Balance sheet risk has become an investment consideration more important than ever, Várkonyi said.

He maintained his view that “the perception of MOL's balance sheet risk is set to improve and it should comfortably meet its debt covenants, even with INA, while PKN faces tough negotiations with creditor banks on obtaining a waiver following the breach of covenants."

The most stretched balance sheet is that of Lotos but in the analyst's view its funding is not at risk. “PGNiG has no leverage at present but this is set to change with its massive capex plans."

“MOL's purchase of INA is the most visible and strongest bottom-up driver. Company-specific stock catalysts are few and far between but we highlight MOL's purchase of INA, set to close in 2Q09," Várkonyi said.

The analyst believes INA should contribute meaningfully to MOL's EBITDA thanks to efficiency improvement and investments into growth.

PKN's planned divestments could be significant for the stock but in the current environment we expect little, if any, tangible progress this year.

Target prices and ratings:

MOL - HUF 17,500 (up from HUF 13,000), Buy
Lotos - PLN 9 (up from PLN 7), Sell
PKN - PLN 18 (down from PLN 19), Sell
PGNiG - PLN 2.55 (down from PLN 2.70), Sell