EUR 32.52 For Business Accounts Only

MFPC EY | Overweight, as strong urea supports robust 2H21

Value proposition in good industry times. MOPCO stock is up over 106% y-o-y, but still trades c67% less than the sector on a 2022e EV/EBITDA of 2.7x (P/E of 5.3x). It offers strong cash generation, with a 2022e FCFE yield of 10% (+12pp to 22% in 2023e even at USD280/t for urea c30% lower than spot), availing faster deleveraging (debt-free by end-2022) and DPS expansion; 2021e dividend yield of 6.6%, rising to 10.6% in 2022e. Our base case factors a EGP2.2bn deduction as the PV of deferred tax payments due over 2021-27e. An income tax exemption, following amendments to Egypt’s free zone regulation, would raise our TP by 34%, all else constant.

Urea’s short-term support should wane. Our view is that the many factors that have triggered a strong rally in urea prices will ‘normalise’ this year. These factors are: i) supply disruptions (in food chain and energy), followed by demand spikes with post-COVID-19 reopening, ii) improved farmer economics (COVID-19-driven government aid to end by end-2021), and iii) high Chinese soybean imports, which should drop, as it has almost fully rebuilt its hog herd post the 2018-19 African Swine Fever outbreak. Spot urea for the Egypt hub is USD415/t (+47% y-t-d) vs. our estimates of USD353/t in 2021, USD319/t in 2022, (trending down, due to supply growth outpacing demand growth via capacity additions), and USD280/t thereon, dictated by production costs in China, as the marginal producer.

Quarterly results key catalyst. 2021e revenue, EBITDA, and net income should rise by 29%, 31%, and 38% y-o-y, thanks to the urea price rally. While 1Q21 results failed to capture the full urea price rebound (because MOPCO locked up export contracts at earlier, lower price points), we expect 2Q21 and 3Q21 results will act as strong catalysts. We look for 2Q21 and 3Q21 bottom lines of EGP882mn (+36% y-o-y) and EGP847mn (+71% y-o-y), respectively.

Risks skewed to the upside. Our urea price forecasts consider new global capacity of 4.2mn tonnes over 2021-23e (yearly average), more than the 3.4mn tonnes of typical demand growth. However, possible delays in these plants, Iranian sanctions, and/or forced closures on ESG adoption would pose upside. Every USD10/t higher long-term urea export price adds 5.8% to our 12M TP, all else constant. A weaker-than-expected EGP is also a strong value driver, in our view.