Kommersant business daily reported that over the next four years, chemical company Metafrax, located in the town of Gubakha, Perm region, plans to build a large plant to produce mineral fertilizers - carbamide and ammonia. What's more, the company projects the carbamide unit's annual design capacity at 600,000-650,000 tons. Should these plans be implemented, this will be the largest carbamide production in the Kama region. In 2006, another producer, Mineralnye Udobreniya produced 498,000 tons of carbamide and Azot 440,000 tons.
For the record: Metafrax is one of Russia's largest methanol and formalin producers. The company exports products to over 20 countries. Around 45-50% of annual output is exported. The company also produces carbamide- formaldehyde and industrial resins in cooperation with Finnish Dynea (JV Metadynea). FY06 sales amounted to Rub 6.2 bln ($248.39 mln) and net profit stood at Rub 1.2 bln ($48.07 mln).
At present, Metafrax is looking to aggressively diversify business and expand its range of high value-added products to become less dependent on fluctuations in global methanol prices which, in turn, depend on energy prices and the number of newly commissioned production facilities. Some time ago, the company announced construction of a new paraformaldehyde unit with annual capacity of 20,000 tons (this product serves as raw material for production of laquer, glue, synthetic resin, pharmaceuticals and disinfectant solutions). Secondary products generate nearly 50% of the company's revenue and this share will most likely rise in the future.
It will cost the company in the range of $150-300 mln to build a new plant with announced capacity. However, the expenses will most likely pay off. This production facility will help Metafrax to meet its in-house raw material needs, since the chemical enterprise currently has to purchase the bulk of carbamide from Perm-based Mineral Fertilizers. Given that global mineral fertilizer prices are on the rise, Metafrax will not only hedge itself against a spike in COGS, but will be able to capitalize on direct mineral fertilizer exports. Meanwhile, a constraining factor for mineral fertilizer producers is higher domestic gas prices, which are expected to reach the European level by as early as 2011 and therefore take a toll on their margins. However, in our opinion, a spike in gas prices will be offset by using gas-conservation technologies and rising global mineral fertilizer prices.
The estimated target price of Metafrax (RTS: mefr), calculated on the basis of peer analysis, is $1.62 per share, which corresponds to a Buy recommendation.
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