EUR 82.68 For Business Accounts Only

Egypt nitrogen fertiliser sector | Downgrade Abu Qir Fertilizers to Neutral, but still see value in MOPCO

Global outlook supporting urea prices. Chinese LNG and coal prices rose by 93% and 35%, respectively, as of Jan-17 to date, on the back of: i) a clamp-down on coal production for environmental reasons, and ii) strong residential demand for heating. This undermined urea production, consequently supporting prices, because, at spot prices, Chinese anthracite coal-based urea plants incur an estimated USD16/t EBITDA loss. We assume an unchanged 2018 urea price of USD266/t (+9% y-o-y), rising to a long-term price of USD340/t by 2021, which we see as the return threshold for a greenfield in low-cost gas regions. We believe global urea prices should strengthen, in particular starting 2019, as new capacity additions in North America will have all been commissioned.

MOPCO our top pick. We raise our 12M TP by 13% to EGP130/share on lower: i) gas prices (2018e gas price at USD2.6/mmBtu vs. USD3.6/mmBtu previously), and ii) capex guidance. The stock trades on a 2018e EV/EBITDA of 5.7x, 32% below global peers. This should fall to 3.7x by 2020, driven by higher prices for urea exports (c75% of its production) and deleveraging: 2017e net debt/EBITDA of 2.1x, falling to 0.4x by 2019e.

Cut Abu Qir to Neutral. Thanks to healthier than previously expected gas availability (110% utilisation rate in 2Q17/18), we raise our total sales volume assumptions, allowing for a lower local/exports sales split of c45/55% (vs. 55%/45% before). We estimate Abu Qir generates 46% EBITDA margins on its export sales, two-folds margins generated on local sales. However, as the stock offers limited upside to our revised 12M TP (+27% to EGP30/share), we downgrade our rating to Neutral on valuation grounds. Abu Qir currently trades on a FY18/19e EV/EBITDA of 8.5x, on par with the global average.

The risk of a gas price hike is downplayed in this sector. This comes as: i) the government imposes a local quota at a discounted price (USD160/t for urea, c40% below export parity), shifting the burden of subsidising domestic farming onto the industry, and ii) the relatively benign urea export prices, ranging between USD250-300/t (an EBITDA of USD83-112/t, incorporating the local subsidy). Accordingly, in our view, it would not be in the interest of the government, also a major shareholder of both stocks, to raise gas prices at the expense of: i) hurting industry profitability, ii) disregarding current feedstock supply agreements at a time the government is pursuing FDI, and iii) diminishing a high USD export stream.