EUR 27.38 For Business Accounts Only

MFPC EY | Time to unleash the value; Reinitiate with OW

A value play tinted with healthy industry dynamics. We reinitiate coverage on MOPCO, Egypt’s biggest urea producer, with a TP of EGP100/share, implying a 2021e EV/EBITDA of c6x, in line with industry’s historical average. Our DCF factors in: i) a 2020-27e fixed urea price of USD270/t, broadly in line with the five-year historical average vs. the current spot price of USD345/t, ii) an unchanged gas price of USD2.7/mmBtu, on our calculations, and iii) deducting EGP3.2bn deferred tax liabilities from our EV calculation. Thanks to its remarkable cash flow generation profile, with cEGP3.6bn FCFF p.a., MOPCO lowered its net debt to EGP3.3bn, as of 3Q20, or 0.8x EBITDA, down from EGP12.5bn in 2016, offering room for gradual pick-up in distributions, as deleveraging completes by 2022e. We look for a 2021e and 2022e dividend yield of 5.8% and 6.5%, respectively.

Global dynamics supportive of fertiliser producers. Egypt’s urea FoB prices expanded by c60% from mid-20 trough, reaching the current USD345/t, boosted by higher input costs, along with robust demand. Henry Hub natural gas and anthracite coal prices have gained 82% and 13% over the past six months, respectively, in anticipation of higher winter demand for heating, and a revival of industrial activity. Major crop prices have rebounded since mid-2020, chiefly on lower yields (corn) and tighter inventories levels (soybean), setting the stage for a brighter 2021 demand outlook for agricultural chemicals, notably in India and Brazil.

Agrium’s overhang behind us; No financial liabilities incurred. On 18 December 2020, Nutrien announced that, via its wholly-owned subsidiary, Agrium, it entered into an agreement with the Egyptian government, to sell its entire 26% stake in MOPCO, while settling all arbitration claims it has made against the Egyptian government and MOPCO’s affiliates, against total gross proceeds of USD540mn. Upon the closure of the settlement, Agrium’s board members have been replaced with the Ministry of Finance representatives (three seats), with no financial liabilities to be incurred related to the case (previously amounted to USD140mn), according to management.

Risks skewed to the upside, with catalysts in sight. We calculate that every USD10.0/t higher-than-forecasted USD270/t for urea export price adds 4% to our model. An income taxes’ exoneration, following the latest amendments to the free zones regulation, should up MOPCO’s TP by 30%, all else constant. Conversely, a hike in the company’s natural gas price to USD4.50/mmBtu from the current USD2.70/mmBtu, on our figures, will knock 34% off our TP, to EGP66.0/share. A mix of an income tax exoneration and the aforementioned upward revision in natural gas price, with constant urea prices of USD270/t, would yield a TP of EGP87.0/share.