Neochim – NEOH – 2024 annual review

• The extraordinary performance, which the company recorded in 2021 and 2022 was followed by a steep decline in the first half of 2023 and continued at a lesser degree in 2024. The great gains in 2021 and 2022 were due to the increased prices of LNG on the world markets resulting from the conflict in Ukraine which disrupted the LNG supply channels and brought a great degree of insecurity. LNG is responsible for 73% of the cost of the production at Neochim (as per 2024 financials, 87% as per 2023 financials) and deviations in the input prices directly affect end produce prices.
• Sales recorded a 4.8% decline in 2024 reaching BGN 279 This was a lesser decline than the 2023 sales drop of 54.5% compared to 2022 figures. The major contributor to the drop in 2024 was the LNG price deviation, while volumes sold were higher, which testifies for great effort of the management to offset price drops by higher quantity sold. The 2 main products – ammonium nitrate and ammonia, which are responsible for over 97% of total sales value marked increased volumes, but the value of the sold produce was negatively affected by the decreased price of LNG.
• The table below, aggregated from data from TradingEconomics shows how LNG prices shot up more than 3.5x on average during the conflict and later, with the introduction of alternative routes and the entry of Turkey as a distributor of LNG from the Caspian Sea, as well as the LNG trade deal with Russia, brought the prices even below pre-conflict times.
• Management expects that sales of ammonium nitrate in 2025 will reach 450,000 tones, which is 13.5% above the 2024 levels. Considering the dependency of the financial result on the price of LNG and the rising cost of it in the last 2 quarters, 2025 can turn out to be very positive for the company if this trend continues.
• The financial reports do not mention the use of hedging strategy to limit the effect of LNG prices fluctuations. It is unclear what the reason is, but research shows that the use of hedging strategies among similar companies is not as common as with the companies reliant on other widely traded commodities. Main reasons for that could be a) strategic choice; b) commercial capability (lack of existing trading & risk management capability to implement and manage hedging strategy); c) limited liquidity (until recently forward liquidity for some key exposures, i.e. markets, have been limited); d) complex exposures (hedging can be complex even for large volumes given LNG contract pricing and volume terms, risks and physical logistics.
• While sales to clients dropped 4.8% to BGN 279mln, the cost for raw materials dropped nearly 28% to BGN 203.5mln. This can be an indicator for an improved way to negotiate and plan LNG supplies. The company estimates that the average price of its main production material dropped by 33.79%. While in 2023 about 75% of the deliveries were done by Bulgargaz EAD, currently all the LNG deliveries are through the gas networks of Bulgartransgaz EAD. The company has not entered into a purchase agreement with any supplier. Instead they supply the product through LNG exchanges based on the TTF Index (Title Transfer Facility, the Dutch gas hub index).
• The profitability metrics ROE, ROA, ROIC mark improvement to previous periods. However, they are still negative on due to the major decline in 2023.

Full report can be downloaded here.