We maintain our bullish stance on Potash Corporation (POT). As the biggest producer of high margin potash at low costs, we believe Potash is well positioned to benefit from a rebound in potash prices. We also believe that if Potash signs the proposed contracts with China by year end, its shipments for next year would be increased. Growing demand in India will also lead to higher demand for Potash. Potash is also offering an attractive dividend yield of 2.1 per cent for dividend seeking investors.
Last week, Potash Corporation of Saskatchewan revealed that its CEO Bill Doyle met with Israeli Prime Minister Benjamin Netanyahu to discuss options to increase the company's ownership in Israel Chemicals (ICL). Potash already owns a 13.84 per cent stake in ICL. In December last year, POT applied to raise its stake to 25 per cent, but dropped the request later. This time around, the talks are focused on a potential merger.
According to Bloomberg's estimates, the proposed deal could cost POT ~$13.7 billion, making it the biggest agricultural chemicals deal. Spencer Churchill, an analyst at Paradigm Capital Inc. in Toronto, said "It's a transformative transaction that would vault them past the Russians into the No. 1 spot globally,"
Roughly 11 per cent of the world's Potash Industry is controlled by ICL. If the proposed merger is approved, Potash Corporation will end up controlling a quarter of the world's Potash Industry, making it the largest producer of the fertilizer. The deal will also help POT boost its sales to India, as 37 per cent of ICL's global exports in 2011 were to the South Asian country.
The three key stakeholders in ICL are Israel Corp, the Israeli government, and Potash Corporation. Israel Corp, with its 52.3 per cent ownership stake, is the largest shareholder in ICL. The Israeli government sold its controlling interest of 25 per cent in ICL in 1995, but the government retained a golden share. Lastly, POT owns ~13.5 per cent shares in ICL.
We see the refusals of antitrust and key stakeholders' approvals as the main hurdles to the proposed merger. The Israeli government holds a golden share in ICL, which allows it to veto any takeover bid that is deemed hostile to Israel's national interest. However, there are examples of other foreign companies owning majority stakes in Israeli national assets. For Example, China National Chemical Corp acquired controlling interest in Makhteshim-Agan Industries Ltd. in 2010. Moreover, Israel recently said that it will consider POT's proposal once it receives a formal request. However, we do have concerns regarding an antitrust approval, since POT could end up controlling a quarter of the global potash supply if the approval is granted.
According to Jason Miner, a New Jersey-based analyst at Bloomberg Industries, "The regulatory hurdles will be high."Miner further said, "People assign a low probability of an acquisition going ahead."
Chinese and Indian Contracts Update:
POT reported disappointing quarterly results, as profits fell by 22 per cent. The delay in signing new supply contracts with China and India led to a significant decline in shipments to these countries. POT expects to sign a new contract with China by year end, but the signing of the contract with India still remains uncertain as the government in Delhi continues to support nitrogen over potash.
The delay in signing new supply agreements has reduced seaborne supply expectations in China. It has also caused internal production and inventory withdrawals. As mentioned above, a new contract is expected by year end, and as inventories are reduced, it could lead to increased requirements next year.
The increase in food requirements and low crop yields indicate strong fundamental demand in the long run; however, reduced subsidies and a volatile Indian rupee have led to uncertain demand in the short term. POT is expecting an increase in demand next year, but the company remains cautious about the proportion and timing of the improvement in demand.
Furthermore, the company believes that demand from both India and China will be less than the demand levels seen in 2011, but since the market will end the year with lower inventories than last year, an improvement is expected in 2013.
We maintain our bullish stance on POT as, we believe, it is well positioned to benefit from a rebound in potash prices. The declining inventories in India and China should also bode well for POT in 2013.
POT is trading at a forward P/E of almost 12x. It has a long term earnings growth rate of 2.6 per cent. The stock has lost 7.5 per cent of its value YTD. The company has a dividend yield of 2.10 per cent.
CF Industries Holdings (CF)
Agrium Inc. (AGU)
Forward P/E (1 year)
Long-term earnings growth rate
Share price Performance (YTD)
Source: Yahoo Finance
POT's YTD Stock Performance (Source: Yahoo Finance)