Recently, speaking at a BMO investor conference in New York, Potash Corp (POT) CEO Jochen Tilk said that if Potash Corp could not build on its SQM and Israel Chemical Limited (ICL, Financial) minority stakes, it may consider selling them.
Potash Corp has four major equity stakes in Sinofert Holdings, Arab Potash Company, SQM and ICL, which together are worth $4.5 billion. While management views the company's stakes in fertilizer companies Sinofert Holdings and Arab Potash Company as "strategic," they continue to review whether to keep its shares in ICL and SQM.
Earlier this year, SQM was hit by a bribery and campaign financing scandal in Chile. SQM’s then CEO refused to cooperate fully with Chilean Government in investigations and three Potash’s representative who were on the board of SQM resigned in the protest.
Potash has a little say in SQM’s operations despite of its 32% stake. Same is true for Israel Chemical Limited. It makes sense for Potash to either increase its stake above 50% or exit these investments. In the past, Potash’s attempt to increase its stake in Israel Chemical has proved unsuccessful. So, clearly divesting these non-strategic investments is the likely choice.
I believe Potash Corp. shares are undervalued at current levels and any increased cash flow from these divestures can help it increase its buy backs and dividends. The company's business fundamentals are also strong, and it is benefitting from strength in global potash demand. Its EPS is expected to increase 3.8% in the current year and 13.2% in FY2016. Earnings will further improve in 2017 when the company's low cost Rocanville and Picadilly operations enter production. Accordingto UBS analyst Brian MacArthur:
“Potash Corp is positioned to benefit from a significant ramp-up of low cost production through 2017 as its new Rocanville and Picadilly operations enter production. The current expansion at Rocanville and ramp-up at Picadilly will increase Potash Corp’s production capacity by nearly 4Mts and should contribute to materially lower costs. In addition, as these mines ramp-up through 2017 capex will decline and free cash flow should increase."
The company's potential to increase revenues and earnings from new production facilities, potential divestment of SQM and ICL stake, and declining expansion spending bode well for its free cash flow profile and the company can return excess cash to shareholders through buy backs and dividends.
Potash Corp is trading at a forward P/E of 15.40 and has a forward dividend yield of 4.70%. According to Gurufocus DCF calculator, the company has a business predictability rating of 3.5 star and offers margin of safety of 31%.
The company's low valuation, high dividend yield, improving fundamentals and potential to return excess cash to shareholders through buy backs makes me bullish on the stock.
