EUR 21.58 For Business Accounts Only

Price weakness to pressure earnings in 2020; Remain Overweight on valuation

Maintain TP of EGP14.1/share, offering 41% upside. We roll over our valuation by one year to 2024e. Our 2020-24e forecasts primarily reflect a: i) higher total sales volume of 23%, mainly on higher SSP exports (+1.3x), ii) 45% lower sulphur price (26% of cost), and iii) 2.3% drop in WACC, on lower interest rates. This is largely offset by 6% lower ASP, and 15% lower USD:EGP over 2020-24e, on recent EGP appreciation. The stock trades on a 2021e P/E of 5.9x, 40% and 29% below peers’ c10x and our DCF-implied multiple, to incorporate more price-elastic SSP demand. This comes against a 2020-21e EPS CAGR of 13% vs. peers’ median of 10%. 

Low phosphate fertiliser prices to pressure margins in 2020; Expect recovery at onset of 2021. A weak application season, exacerbated by challenging global trade, lowered phosphate fertilisers’ prices in 2019. TSP price (2x SSP’s P content) dropped 22% y-o-y to USD243/t in 2019 (spot price at USD275/t, US South Central FOB). We expect a 2020-24e CAGR of 2.6% in ASP in USD, due to the expected pick-up in crop demand (soybean is SSP end use), as per CRU. For feedstock, we expect sulphur price to record a 2020-24e CAGR of 7% to USD80/t, to factor the expected hike in freight cost (+10-20pps), post the implementation of the IMO regulations. We expect EFIC to post 2020-24e average EBITDA margin of c21% (-3pps vs. 2013-19).

Lower interest rates to boost earnings amid leveraged balance sheet. We look for EBITDA to grow at a 2020-24e CAGR of 9% (2014-19 CAGR of 1.3%), and lower interest rates (-6.5pps over 2018-19) to transcend into a higher 2020-24e EPS CAGR of 16%. Nonetheless, raw material inventory (sulphur and phosphate) stood at 150 days in 9M19, which management expects to cover 1H20 feedstock requirements, vesting higher deleveraging in 2020e (net debt/EBITDA of 2.0x).  

New management’s export strategy materialises. While, we expect EFIC’s newly appointed management to maintain high SSP export volume at 376mn tonnes in 2020 compared to 365mn in 2019 (238mn in 2018). However, we highlight downside risks as: i) every 100bps higher-than-forecast sulphur price lowers our valuation by 140bps, and ii) every 100bps stronger EGP forecasts knock 20pps off TP.