Engro Fertilizers Limited: Multiple triggers on the horizon; maintain ‘Buy’
- Several developments over the past few weeks have begun to point towards growing risk of urea price softness and as such upside and downside risk to urea prices appear to be balanced.
- Engro Fertilizers Limited (EFERT) is currently carrying out a debottlenecking (DBN) project on its EnVen plant expected to be completed by 4QCY18 at a cost of PKR1.5bn. This would allow the company to produce an additional 100k tons of urea subject to additional gas supply.
- We revise up our earnings estimates for EFERT by 20%/4%/1% over CY18/19/20E to PKR10.5/9.2/9.7 per share, respectively. The upward revision in earnings stems from (i) reduction in deferred tax liability, (ii) PKR150/bag increase in DAP prices, and (iii) actual 1H18 financial results.
- Accordingly, we arrive at a new TP of PKR91/sh for EFERT (+5% from previous), which represents a total return of 25% (D/Y: 11%) at last closing price; we reiterate EFERT as our top pick.
- Key downside risks include (i) sharp hike in gas tariff and (ii) adverse legal outcome of GIDC litigation, whereas, key upside risks include (i) further hike in urea prices, and (ii) higher production of urea post completion of DBN.
Engro Fertilizers Limited is a Pakistan-based company, which is engaged in manufacturing, purchasing and marketing of fertilizers. The Company's brands include Engro Urea, Engro NP, Engro DAP, Zingro, Engro MOP, Engro SSP and Engro Zarkhez. Engro NP is the Company's fertilizer brand with Nitrogen and Phosphorous content in equal quantity. Engro DAP primarily contains Di-Ammonium Phosphate, and is imported by Engro EXIMP and marketed by the Company. Engro DAP is marketed in approximately 50 kilogram bags. Zingro is a micronutrient fertilizer, and is imported by Engro EXIMP and marketed by the Company. Engro Zarkhez has Nitrogen, Phosphorous and Potassium, and is primarily offered for sugar cane, fruit orchards, vegetables, potato and tobacco farming. Engro Envy is primarily offered to urban market for gardens, lawns, flower beds, fruit plants and ornamental plants. The Company is a subsidiary of Engro Corporation.
BMA is amongst the leading financial groups in Pakistan. BMA Capital’s core areas of business include Capital Markets, Corporate Finance & Advisory, Asset Management, and Financial Products Distribution. BMA Capital is the leader in privatisation advisory in Pakistan, having successfully advised on over 50% of all privatisations in Pakistan, by value, in transactions valued in excess of US$4 billion. Recent transactions include joint lead managing the $813 million GDR Offering of 10% of OGDCL on the London Stock Exchange in 2006-07, and advising Etisalat on their successful acquisition of a 26% strategic stake in Pakistan Telecommunications Company Limited (PTCL) for US$2.6 billion, the largest M&A transaction and foreign direct investment in Pakistan’s history. The firm is among the top brokers in the Pakistan equity and treasury markets, and is among a handful of firms that comprehensively cover all segments of the capital markets. This is supported by a very strong and independent research capability, which is quoted regularly in both local and international media. BMA Capital’s retail brokerage brand, BMA Trade, has launched a nationwide network of branches as well as a comprehensive online trading platform, enabling investors across Pakistan to take part in the capital markets.
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