EUR 100.38 For Business Accounts Only

Positive developments solidify our stance

Global supply/demand outlook implies strengthening urea prices. We maintain our positive outlook on the nitrogen fertiliser sector, on: i) supply growth falling lower than global demand growth, closing the oversupply gap, ii) Chinese exports remaining at lower levels (-74% y-t-d), iii) the US’ decision to pull out of the Iran nuclear deal to hit the country’s urea exports, and iv) steady demand from India (+43% y-t-d), as progress with new greenfield investments has been limited. We hold our 2018 average urea price at USD266/t (+9% y-o-y) vs. a spot price of USD290/t and 1H18 average of USD257/t (+11% y-o-y), reaching USD280/t in 2019. A downside risk would be a decline in Chinese energy costs, bringing back idled capacities to the market, thus, weighing down on prices.

MOPCO: Remain buyers on fundamentals and positive outlook. MOPCO trades at 2019e EV/EBITDA of 4.8x, a 43% discount to the global average. Our TP of EGP 130/share offers 30.6% upside. We look for a 2018-20e EPS CAGR of 46%, 2x the global average, boosted by a declining effective tax rate, reaching 22.5% by 2020, falling from 38% in 2017 (negatively impacted by changes in deferred tax recognition). MOPCO is well-positioned to capitalise on the urea export price increase, with an exports/local sales mix of 75%/25%. We downplay the risk related to the fertiliser’s low local quota and favourable gas price agreement, especially with sluggish local demand and gas availability.

Abu Qir: Strong operations and balance sheet, yet fairly priced. The fertiliser producer trades on a 2019e EV/EBITDA of 8.3x, in line with the global average. This comes thanks to the company’s exposure to the global market (currently exporting c55% of total production vs. 40% in FY16/17), in tandem with the rise of urea prices. We maintain our Neutral rating on the stock, as our valuation offers limited upside potential. An upside risk to our base case would be an announcement of a new expansion, other than the new ammonium nitrate line, to make use of the company’s EGP3.5bn of cash. On the other hand, a USD1mm/Btu increase in gas price would cut our TP by 17% to EGP25.0/share.

Expect strong set of 2Q18 results. We foresee a strong quarter for the two fertiliser producers, capitalising on the 24% increase of Egypt FOB urea price, averaging USD249/t in 2Q18. MOPCO’s 2Q18 EBITDA is seen at EGP1.2bn (+27% y-o-y), implying a 63% EBITDA margin. We anticipate the company’s cash generation to exceed the EGP1bn mark, enabling MOPCO to service its debt and continue its deleveraging. On the other hand, we expect Abu Qir’s EBITDA to surge by north of 69% to EGP766mn, implying a 38% EBITDA margin, thanks to the increase in export share, in tandem with the rise in urea prices.