Citi has initiated coverage of Israel Chemicals Ltd. (TASE: CHIM) with a "Buy/Medium risk" recommendation at a target price of NIS 56, compared with yesterday's closing price of NIS 45. The company's market cap is $14.8 billion.
Citi notes, "Despite a strong run in 2007, we believe the shares offer further upside. Israel Chemicals has tremendous leverage to the attractive potash and phosphate markets, which should account for about 80% of EBIT (earnings before interest and tazes) in 2008, and drive a near doubling year-on-year of EBIT and earnings per share."
Citi analysts Daniel Mor, Andrew Benson, and Sophie Jourdier add that Israel Chemicals is traded at a discount compared with its peers Potash Corporation of Saskatchewan Inc. (NYSE: TSX:POT), JSC Uralkali (LSE; RTS:URKA), Mosaic Company (NYSE:MOS), Agrium Inc. (NYSE:AGU), K+S Group AG (XETRA:SDF), and Albemarle Corporation (NYSE:ALB). "We believe this is unwarranted given Israel Chemicals' growing leverage to the fertilizer market."
Citi says that the outlook for potash is strong and based on demand growth over the next fives years coupled with tight grain markets and increased fertilizer use in India and China. In addition, Citi predicts that prices for both potash and phosphate will rise further. "We forecast Israel Chemicals realized potash and phosphate prices to rise 35% and 27% respectively in 2008, assuming a circa $90/ton increase in the annual Chinese potash price negotiation with the Russians. This would have a demonstrable knock-on effect of further increases globally."
Finally, Citi points out, "Israel Chemicals is strongly cash generative and intends to return up to 70% of its quarterly net income to shareholders via dividends. The 4.4% dividend yield on the shares compares with less than 1% for the global fertilizer group."
Citi predicts that Israel Chemicals will report a net profit of $471.6 million on $3.89 billion revenue in 2007, and a net profit of $933.9 million on $4.82 billion revenue in 2008.
Published by Globes [online], Israel business news - www.globes-online.com - on December 12, 2007
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