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Tough 2018; Downgrade to Neutral

Cut TP by c39% to EGP14.1/share. Our updated valuation reflects primarily: i) higher phosphate rock and sulphur prices (c51% of cost in 2018e), ii) lower GSSP exports of 100k tonnes in 2018e (135k in 2017a vs. management guidance of 250k) vs. our previous estimate of 174k, and iii) a DCF roll-over. EFIC trades on a 2018e P/E of 16x, c33% above the local peer average, falling to c5x by 2020e, due to higher SSP prices and volumes. This is at a 43% discount to local peers, which we believe fairly captures EFIC’s products’ more price-elastic demand vs. urea, SSP low P content (30% vs. 46% for TSP), and EFIC’s standalone old plants (88 years old).

Narrow margins on higher feedstock cost and gradual pass-through. Phosphate rock (22) rose by 38% q-o-q to cUSD19/t in 2Q18 vs. +20% for the (30) grade to USD33/t and the (60) grade export price of USD50/t. We expect a marginal 2-3% growth in both rock grades in 2019e and onwards. Separately, sulphur price reached USD190/t in 4Q17 (USD125/t in 1Q18), which we anticipate to decline by c3% p.a., in tandem with the crude oil price. We expect EBITDA margin to fall to 16.3% in 2018 (18% in 1Q18) vs. 25.6% in 2017, amid EFIC’s less favourable product mix, requiring a gradual pass-through to end prices, to preserve volumes from declining.

Lower volumes in 2018, but expect gradual recovery afterwards. We expect PSSP and GSSP sales volumes to drop by 20% and 18% y-o-y in 2018e, respectively. This comes on the back of the company increasing its prices of local PSSP by 22% q-o-q and export GSSP by 13% q-o-q in 2Q18, following the phosphate rock and sulphur price hikes. Nonetheless, volumes should recover in 2019e, on potential improvement in farmer affordability, owing to their lack of ability to currently pass through. We expect GSSP exports to increase by 10k p.a. to 150k by 2023e.

Marginal impact from energy price hikes. EFIC’s plants use steam released during the production of sulphuric acid to generate their energy requirements. The price of natural gas (c12% of costs, including spare parts), which is used to power machinery, did not change in the last round of subsidy cuts (16 June). EFIC incurs a marginal transportation cost, as it sells its products ex-factory for local sales, while its plants are situated near the harbour area for export sales.