THE NEXT BIG THING | Updated: 29-Jan-13
Analysis of upcoming IPOs and spin-offs, as well as secondary plays on highly-anticipated new issues.
PetroLogistics: Rising Propylene Prices Bodes Well for Margins & Dividends (PDH)
At 8:37 this morning, we published a comment on InPlay stating that we are hearing that Morgan Stanley is out cautious on paint and coating companies -- SHW, PPG, VAL, RPM -- due to the threat of rising propylene prices. According to the note, over the past month, propylene prices have risen by ~25%. Propylene is a main input used to manufacture consumer and industrial products like paint, coatings, plastic parts, ropes, and textiles. While these purchasers of propylene may find their margins squeezed, the opposite is true for companies that produce and sell it.
Some may recall that on January 3 we highlighted one such company, PetroLogistics (PDH), in our report titled "Improving Margin Outlook & High Yield Make This a Name to Consider." PDH, an IPO from last May, operates the world's largest propane dehydrogenation facility. It's 67-acre plant in Houston turns propane into propylene, a chemical used in the production of polypropylene. Similar to refiners, the company's margins and profits are driven by the spread between its core input prices (propane) and its output prices (propylene). When propane prices are low and/or propylene prices are high, its margins expand, allowing it to pay out larger distributions.
There were a couple key items that stood out to us when we were taking a look at PDH back in early January. The first is, there was solid evidence pointing to a strengthening "Propane-to-Propylene" spread. Stifel Nicolaus upgraded PDH on 1/2/13 based mostly on forecasts for propane and propylene prices. Further, PDH's commentary during its Q3 conference call regarding propylene prices was bullish. Management stated that prices bottomed in August, began edging higher in September and October, and that due to a correction in propylene inventory, prices should continue to move in its favor. On the propane side, its price is highly correlated to natural gas. Natural gas prices have been on the move lower recently, and longer-term, PDH believes that the high supply of natural gas should contain propane costs. So, at the moment, it appears that PDH's spread has trended in the right direction.
The other item that stood out was its dividend -- specifically, the possibility that its payouts will increase soon. It's last distribution of $0.21/share for Q3 pencils out to an annual yield of ~5.4%, which was a bit disappointing for a company that pays out all its cash to unit holders. However, PDH believes that its coming off a quarter in which it considered to be "a bottom" and its prospects for higher margins looks good. As its margins grow, so should its distributions. Dahlman Rose is forecasting a 2013 distribution of $1.52/unit, equating to a yield of ~10%, and Stifel Nicolaus is projecting a distribution of $1.49/unit.
To conclude, we again wanted to put this name in front of you as the underlying trends in its business continue to improve. PDH is also scheduled to report its Q4 results after the market closes on February 6. The stock has been on the move higher, up 15% year-to-date, but with a 1-year forward P/E of ~10.6x and with EPS expected to grow by 74% this year, the stock still looks pretty cheap.