Teraplast First Impression 4Q 2009 (RAS)

Sales of own production were up 12% yoy to RON 38.2 mn, while sales of merchandise climbed 50% yoy to RON 11.1 mn. The company did not provide a sales breakdown by segments.

Higher raw material costs: On the cost side, the increase in raw material costs (+ 21% yoy to RON 23.2) had the largest negative impact on TRP profitability. Raw material costs represented 61% of sales compared to 56.3% in 4Q 08. This can be explained by the recovery of PVC prices and weak market demand, which led to strong deflationary pressures. At the same time salaries expenses dropped 40% yoy to RON 6 mn. Adding to the equation higher depreciation costs and costs related to the homologation of new products, relocation process and higher third parties expenses EBIT came at RON 2.5 mn, almost 60% lower yoy and below our expectations. TRP posted a financial loss of RON 2.6 mn due to RON depreciation versus the EUR (lower than we expected), which sunk the bottom line close to the breakeven point. We had expected TRP to show a minor net loss of RON 0.3 mn, on higher financial losses.

Teraplast results were negatively impacted by scarce financing sources for private projects as well as by difficulties faced by state with financing the public projects. In spite of these factors, which resulted in more than 20% contraction in the main markets the company is active, TRP was able to consolidate its position on the market (i.e. its market share increased to 43% from 40% on the PVC pipes market)

Outlook and recommendation: TRP management expects the weak business environment to continue over the first months of 2010, while a recovery is most likely to happen not earlier than the second part of the year, basically confirming our main assumptions for 2010. We remind that our model is based on IFRS consolidated results (which include the results of Politub and Plastsistem) and a direct comparison between reported results and our model is less relevant. Nevertheless, we fell TRP result broadly fit our projects and we consider them as neutral. Consequently, we maintain our Hold recommendation and 12-m target price of RON 0.67.