Equity Analysis /
Croatia

AD Plastik Group: Life in plastic, it’s fantastic; Strong Buy

    InterCapital
    9 December 2019
    Published byInterCapital

    We update our coverage of AD Plastik with a STRONG BUY recommendation and a price target of HRK 235 per share. According to 2020 projected values this translates into 6.4x EV/EBITDA and 8.1x P/E. There are several reasons behind our positive view: 

    Securement of long-term contracts with guarantee payments. AD Plastik has recently secured EUR 215m in long-term contracts for the production of car parts. This amount roughly represents slightly above 1Y of company’s sales. These contracts secure both business operations and cash flow for the upcoming period. The reason behind this lies in the fact that AD Plastik receives the full contracted amount either in the form of sales or in reimbursements, in case the agreed amount of parts wouldn’t be ordered.  

    This year sales are expected to increase 14%, mostly on the back of deals secured in 2017 and 2018, which amount to EUR 270m. Meanwhile, contracts secured in this year amount to EUR 215m and are expected to boost sales by 2% and 8% in 2020 and 2021, respectively coupled with overall estimated increase of 100 bps in EBITDA margin. 

    Strong potential of the Russian car market. As one can notice in our industry analysis the EU and Russian automobile market have historically shown movements in opposite directions. Thus, as we witness a decrease in the number of newly registered cars in the EU one can expect an awakening of the Russian market.  

    However, one should also highlight a downside to this business model. The company is heavily exposed to a single customer, namely Renault, with whom it became involved in the Edison project, when it started producing components for new Twingo and Smart models. Although AD Plastik has made some steps to reduce their exposure, the French car maker still plays an important role in the company’s top line, implying dependence of AD Plastik’s result to Renault’s. 

    Lastly, although we cannot value it through our models, we stress and appreciate company’s and management efforts of increasing corporate governance, transparency and investor relations coupled with inclusion into Croatia’s Prime Market Index alongside the largest Croatian corporates.