EFERT: Higher exposure to weak Urea business offsets positives; Neutral
We downgrade EFERT to Neutral with a reduced TP of PRs62/sh (down 8%). EFERT’s rising concentration in the ailing Urea business is effectively offsetting positives from lower gas prices. Healthy payouts on resolution of subsidy accruals and maintaining leverage remain the only silver lining, in our view.
EFERT announced 2QCY17 EPS of PRs1.86, up 3.56x YoY (vs. our expected EPS PRs1.68) led by 125% YoY growth in Urea offtake, 25% YoY drop in finance cost and relatively lower gas prices applicable on the old plant. EFERT also announced first interim cash dividend of PRs2.5/sh.
The stock is trading at a P/E of 9.8x (4% discount to KSE-100); a healthy D/Y of c. 9% remains its only attraction. We will be more positive on EFERT if industry Urea demand recovers and inventory overhang is over, or the sector regains its pricing power.Engro Fertilizers Limited is a Pakistan-based company, which is engaged in manufacturing, purchasing and marketing of fertilizers. The Company's brands include Engro Urea, Engro NP, Engro DAP, Zingro, Engro MOP, Engro SSP and Engro Zarkhez. Engro NP is the Company's fertilizer brand with Nitrogen and Phosphorous content in equal quantity. Engro DAP primarily contains Di-Ammonium Phosphate, and is imported by Engro EXIMP and marketed by the Company. Engro DAP is marketed in approximately 50 kilogram bags. Zingro is a micronutrient fertilizer, and is imported by Engro EXIMP and marketed by the Company. Engro Zarkhez has Nitrogen, Phosphorous and Potassium, and is primarily offered for sugar cane, fruit orchards, vegetables, potato and tobacco farming. Engro Envy is primarily offered to urban market for gardens, lawns, flower beds, fruit plants and ornamental plants. The Company is a subsidiary of Engro Corporation.
Intermarket Securities Limited (IMS) is a full service corporate brokerage firm based in Karachi, Pakistan. We service both domestic and international clients. IMS was ranked #2 Best Local Brokerage and #3 Best for Overall Country Research for 2016 by AsiaMoney.
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