Nova Chemical Not Quite Super

Nova Chemical’s (NCX) earnings are driven by a relatively strong ethylene and polyethylene market and cost-cutting in the styrenics business. However, higher oil and gas prices are driving feedstock cost of the company.

Nova derives all its revenues from the plastics and chemical business. This makes it more sensitive to the cyclical nature of the plastic and chemical industry as compared to the peers who are diversified. The slowing economy is likely to result in lower prices and volumes. Apart from this, higher debts and low free cash flows raise concern as well. As a result, we rate the stock a Hold with a target of $28.00.

We are optimistic about Nova’s long-term prospects as it stands to benefit from the ethylene and styrenics up-cycle. Moreover, Nova continues to increase production of high-margin advanced Sclairtech polyethylene. Nova is also concentrating on cost-reductions and business restructuring.

Although Nova’s business conditions are improving, operating rates in ethylene chain are still below the 92-93% range, which is essential for a sustainable recovery in pricing power. The global ethylene cycle could have a cyclical decline beyond 2008; based on 8% average annual supply increases over 2009-2011 versus 4% demand increases.

Currently, Nova is valued at 9.0x our 2008 estimate of $3.05 and we set a target of $28.00. This is 9.2x our 2008 estimate.

Read the full analyst report on NCX