Pakistan Fertilizer: Proposed gas price hike - savior for some, (AKD Daily, Jun 23, 2020)
Pakistan Fertilizer: Proposed gas price hike - savior for some
- Citing latest submitted ERR applications to OGRA, SNGP and SSGC have sought an increase in gas prices, with feed/fuel gas prices for Fertilizer sector proposed to be increased by 329/26% to PkR1,287/mmbtu, where we remain apprehensive over the potential materialization of hefty gas price increases.
- To recall, 135/32% feed/fuel gas price increase approved by OGRA in Jan’19 was revised down to 5/64% increase, with cushioning against negative spillovers on consumers the likely motive behind subdued price hikes. If the currently tabled proposal is approved, our workings suggest a PkR160/bag impact.
- In the unlikely event of materialization, gas price hikes would augment the investment case for concessionary gas based players, specifically EFERT. To note, EFERT currently holds 415K tons of urea inventory, as of Apr’20. Barring subsidies on urea (PkR243/bag approved in May’20, but recently stalled), EFERT would have had to offer discounts in 2HCY20.
- In the event of a gas price hike and 100% pass-on to the end consumers, EFERT may be able to maintain urea price lower than FFC post gas price hike, resulting in improved offtake in 2HCY20.
- We have a Neutral stance on EFERT with a TP of PkR56/sh, implying a total return of 8.76% at last close. EFERT’s urea offtakes during 2QCY20TD indicate sluggish earnings outlook for the quarter. We therefore advise investors to buy on dips.
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