EUR 96.12 For Business Accounts Only

Egypt nitrogen fertiliser sector | Expect a stellar 2H18 performance

Reiterate our positive stance on nitrogen fertiliser players. The incremental rise in Egypt fob urea price during 3Q18, crossing the USD300/t mark, which did not come to our surprise, has been further boosted by Iran’s exclusion from India’s tenders due to the former’s status as a sanctioned country. This has buoyed urea prices, currently hovering around USD335/t, with average 2018 y-t-d Egypt fob urea price of cUSD277/t, surging 16% y-o-y, solidifying our positive stance. With winter just around the corner, urea prices, north of USD300/t, are here to stay for the coming two quarters, in our view. Nonetheless, we opt to keep our 2019 and 2020 estimates of USD280/t and USD300/t, respectively, unchanged, given the potential spring back of idled capacities, increasing global supply and weighing down on prices.

MOPCO: Best-poised to capitalise on higher urea price. We expect MOPCO to deliver an outstanding 150% y-o-y 2018e EPS growth amid an increasing urea price environment, along with a dwindling deferred tax rate. The stock trades on a 2019e EV/EBITDA of 4.2x, c50% below the global peer average, unwarranted, in our view, given the company’s healthy cash flow generation profile, as it stands to post the highest earnings growth as a result of a urea export price hike. MOPCO generates +60% EBITDA margin thanks to its: i) exposure to the global market (exporting 70-75% of production), and ii) favourable gas pricing formula yielding USD3.35mm/Btu at the current urea export price, based on our calculations.

Abu Qir Fertilizers: Attractive entry point, upgrade to OW. We raise our TP by 6.6%, as we roll over our DCF. The stock trades on a 2019e EV/EBITDA of 7.3x, a 13% discount to global peers and the industry historical average. This comes despite the company’s 2018-20e EBITDA CAGR of c35%, two-fold global peers. Catalysts include: i) progress on Abu Qir’s USD150mn new ammonium nitrate line, contributing c6% to our TP, or EGP2.00/share, ii) the government’s potential 30% stake sale, improving the stock’s liquidity, and raising the odds of a potential inclusion in the MSCI Standard index, and iii) KIMA’s new line coming online in 2Q19, adding 239k tpa of urea to the local market, potentially lowering Abu Qir Fertilizers’ local quota.

KIMA: Upgrade to OW post sell-off; Expect KIMA 2 commissioning in 2Q19. Following the closure of the EGP1.2bn funding gap via a rights issue, we update our valuation to primarily reflect a debt-to-equity mix of 62/38 for the EGP11.6bn KIMA 2 project (91% complete). KIMA 2 should drive FY19-21e earnings up at a CAGR of 188%, allowing for faster deleveraging (ND/EBITDA of 3.7x in FY20e). The stock has shed c38% since our initiation on 20 November 2017, trading on an undemanding FY20e EV/EBITDA of 5.6x; a 27% discount to global peers, on a FY19-21e EBITDA CAGR of 247%, representing an attractive entry point in the name.