EUR 4.27 For Business Accounts Only

ENGRO Corporation (ENGRO): 1Q2019 EPS Rs7.7, -4% YoY ( +45% QoQ); DPS of Rs7/share (Below expectations)

 

• Engro Corp announced its 1Q2019 earnings, wherein the company reported decline of 4% YoY in its bottom line due to 25% YoY decline in earnings from its petrochemical arm (Engro Polymers) and increase in admin expenses by 189% YoY in  its unconsolidated operations.  The company declared interim cash dividend of Rs7/share.
• Engro Polymers (EPCL) earnings declined due to absence of insurance gain amounting to Rs250mn that EPCL recognized in 1Q2018 and higher finance cost (+70% YoY).
• Unconsolidated admin expenses are on rising trend (YoY) for the third consecutive quarter. During 1Q2019, the company witnessed 190% YoY growth on back of expenditures being incurred on creation of ‘Engro Leadership Academy’ (for training of its employees) and other  feasibilities related expenses. Fertilizer business showed stagnant profitability during the outgoing quarter, where profit of EFERT was up +3% YoY due to recognition of unusual income to the tune of Rs650mn on sale of land to EPCL. Core earnings of fertilizer business were down 10-12% YoY.
• Alongside results, the company announced 3 material informations, 1) investment in EXIMP FZE (Rs1.76bn), a dormant asset of Engro Fertilizer (EFERT), 2) Investment in Polypropylene Plant (feasibility stage, no timeline/capex mentioned), and 3) Investment in telecommunication vertical to the tune of Rs7.5bn. We believe, telecommunication investment of Engro is similar to DAWH’s investment (but at lower scale) in tower share business (Edotco), that was eventually called off amidst delays in regulatory approvals. To note, DAWH was expecting IRR of 23% on its tower share business.
• We highlight 1) poor crop season, 2) scarcity of water for sowing season 3) volatility in polymer margins and 4) change in regulatory structure in energy division as key risks for the holding company.