EUR 55.70 For Business Accounts Only

Egypt urea industry update | Urea is going stronger; Favour EKH, on better growth outlook, share liquidity

Urea fundamentals beat. Granular urea prices have risen c170% y-t-d to USD752/t (Egypt, fob), spurred by rising energy costs. Europe’s energy crisis has sent natural gas prices to a record USD31/mmBtu (Dutch TTF gas hub), and a cutback on coal production in China has propelled the price of coal (c75% of its urea production) to a 2012-21 high of USD153/t. This situation will likely persist over 1Q22. While crop inventory is low, we predict that the combination of: i) new urea capacity hitting the market (mainly Nigeria, 3mn tpa), ii) ‘looser’ pollution-control approach in China (for now), and iii) increased gas supply to Europe, to ease urea prices from current highs. We look for a 4Q21 urea price of USD650/t (USD475/t in 2021), and a 2022 average of USD450/t (+41% vs. previously).  

Raise 12M TP for MOPCO by 40%, implying a 2022e EV/EBITDA of 4.2x. Shares of MOPCO are up over 30% since our last update on 27 June, but the stock still trades on a cheap 2022e EV/EBITDA of 2.4x vs. its five-year historical forward multiple of 4.4x. It offers strong cash generation, with a 2022e FCFE yield of 15% (+5pp to 20% in 2023e, even at a urea price of USD308/t, c60% lower than spot), availing faster deleveraging (net cash and debt-free by end-2021 and end-2022, respectively) and DPS expansion; 2021e dividend yield of 10%, rising to 13% in 2022e. An income tax exemption, following amendments to Egypt’s free zone regulation in 2020, would raise our 12M TP for MOPCO by 31% once the law comes into effect.
 
EK Holding our preferred among the two. While EKH trades on a higher 2022e EV/EBITDA to 4.6x (vs. 2.4x for MOPCO and c6.6x for global fertiliser peers), its business diversification and expansion plans (USD500mn over 2021-26e) are positive. The growth of its other segments should offset the drop in Alexfert’s (26% of SoTP) profitability once urea prices normalise beyond 2022e, leaving a 2022-25e EBITDA CAGR of 0.07% (vs. -6% for MOPCO). EKH’s EGP listing has improved share liquidity (EGX average daily turnover now USD2.2mn vs. USD0.7mn previously and USD0.26mn for MOPCO), noting possible eligibility for inclusion in the MSCI EMSCI late-2022. We raise our 12M TP for EKH 6.5% to USD1.63/share (EGP25.5/share), on higher urea price forecasts.
 
Risks skewed upwards. Egyptian urea producers are strategically located to benefit the most from a stronger merchant market. Every USD100/t higher-than-forecasted 2022e urea export price adds 2.9% and 1.2% to our 12M TPs of MOPCO and EK Holding, respectively, all else constant. Accelerating closures of plants that use coal and old-gas technology pose strong medium-term upside to urea prices, as more governments work towards net-zero emission targets.