CLSA maintains outperform on Reliance Industries
CLSA has maintained its Outperform rating on Reliance Industries after the company announced its plans to make a non-binding cash offer for all the assets of LyondellBasell (LB), the world’s largest polymer producer.
By ET Bureau |
MUMBAI: CLSA has maintained its Outperform rating on Reliance Industries after the company announced its plans to make a non-binding cash offer for all the assets of LyondellBasell (LB), the world’s largest polymer producer.
“LB filed for bankruptcy in early 2009 under its US $ 24bn debt load after market conditions deteriorated in late-2008, which saw it almost run out of cash. LB filed a plan for reorganisation in September 2009 to emerge out of bankruptcy in early 2010; this broadly seeks to transfer LB to its creditors in lieu of extinguishing about US$18bn of its pre-bankruptcy debt. While the specifics of Reliance’s offer are unknown, it offers an alternative for LB to pay off its creditors in cash and gives Reliance a controlling stake. This initial offer opens up data-rooms for detailed due diligence after which we expect Reliance to make a firm offer; this will need to be approved by the bankruptcy court and two-thirds of creditors - the process should take six months.
LB is a compelling one-off opportunity for Reliance, in our view, but upsides will depend on its ability to improve operations (LB’s olefins plants run at about 85% operating rates, while the Houston refinery has been losing money), how quickly the refining/petchems cycles turn around and the total enterprise value (TEV) ascribed by Reliance for LB.
LB’s Ebitda peaked at US$4.7bn in 2006-07 (an indication of potential upside leverage) but is annualising at US$2bn in 9m09. LB expects this to fall to US$1.6bn in 2010 but recover thereafter averaging US$2.4bn over 2010-14.
This would indicate that even a US$14-15bn TEV would be fair (6x EV/Ebitda) but a margin of safety may be necessary to discount the chance of a persistent downturn. We would view the acquisition as positive as long as the TEV remains below $12 billion. Reliance’s actual cash outflow will depend on the stake it seeks. For a 51% interest, this will be US$6bn. It is adequately funded with US$4bn in cash and US$8bn in treasury stock besides access to extra leverage of up to US$6bn.
At these valuations, we estimate that the acquisition to be cash EPS accretive from year one. Our fair value remains Rs 1,915/share (-10%) pending further clarity but we foresee minimal changes given Reliance’s size (10% accretion requires US$8bn in incremental value),” said the CLSA report.
“LB filed for bankruptcy in early 2009 under its US $ 24bn debt load after market conditions deteriorated in late-2008, which saw it almost run out of cash. LB filed a plan for reorganisation in September 2009 to emerge out of bankruptcy in early 2010; this broadly seeks to transfer LB to its creditors in lieu of extinguishing about US$18bn of its pre-bankruptcy debt. While the specifics of Reliance’s offer are unknown, it offers an alternative for LB to pay off its creditors in cash and gives Reliance a controlling stake. This initial offer opens up data-rooms for detailed due diligence after which we expect Reliance to make a firm offer; this will need to be approved by the bankruptcy court and two-thirds of creditors - the process should take six months.
LB is a compelling one-off opportunity for Reliance, in our view, but upsides will depend on its ability to improve operations (LB’s olefins plants run at about 85% operating rates, while the Houston refinery has been losing money), how quickly the refining/petchems cycles turn around and the total enterprise value (TEV) ascribed by Reliance for LB.
LB’s Ebitda peaked at US$4.7bn in 2006-07 (an indication of potential upside leverage) but is annualising at US$2bn in 9m09. LB expects this to fall to US$1.6bn in 2010 but recover thereafter averaging US$2.4bn over 2010-14.
This would indicate that even a US$14-15bn TEV would be fair (6x EV/Ebitda) but a margin of safety may be necessary to discount the chance of a persistent downturn. We would view the acquisition as positive as long as the TEV remains below $12 billion. Reliance’s actual cash outflow will depend on the stake it seeks. For a 51% interest, this will be US$6bn. It is adequately funded with US$4bn in cash and US$8bn in treasury stock besides access to extra leverage of up to US$6bn.
At these valuations, we estimate that the acquisition to be cash EPS accretive from year one. Our fair value remains Rs 1,915/share (-10%) pending further clarity but we foresee minimal changes given Reliance’s size (10% accretion requires US$8bn in incremental value),” said the CLSA report.
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