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Karachi,January 09, 2014 (PPI-OT): AKD Securities reinitiate coverage on Engro Corp. (ENGRO) following AKD Securities blackout period owing toAKO Securities! position as the lead book builder for the IPO of Engro Fertilizers.
According to AKD Securities, after a blip in CYI2, wherein the company posted consolidated earnings of just PkR1. 8bn (EPS: PkR2.6) following losses for the Fertilizer business (gas shortages), CYi3E and CYI4F are likely to be years of record profitability for the Group on the back of I) rebound In the fertilizer business following provision of gas to both plants and ii) rebound in profitability for EF000S expected in CYI4.
Moreover, the company has also been shortlisted as the sole preferred bidder for handling and regasification of LNG import from Qatar in view of GoP’s resolve to meet the energy shortages within the country which could unlock further value in the scrip. ENGROs earnings as well as valuations could come in tbr sharp upward revision should the GoP decide to honor its commitment of Engro Fertilizers new 1.Smn tons capacity with feed gas at a rate of US$0.7 per mmbtu.
That said, gas supply situation remains a key question mark for Engros performance going forward where even the %fertilizer industry’s long term gas solution remains clouded with uncertainty with the issue running into bureaucratic red tape. At current levels, AKD Securities have a Neutral stance on the stock with a target price of PkRI59.6/share, with an conviction call (either buy or sell) hinged on gas prospects.
Gas remains a contentious issue – on the Supply & Price side! The Fertilizer business for Engro has commanded much of the attention in the market where concerns remain on bath the supply and the price side. In this regard, the company had already obtained 2Ommcfd from Man SML starting Apr’13 while recently the Reti Maru field has also started trial production with facilities testing being undertaken at the moment. Gas volumes expected from Reti Maru stand at 10mmcfd.
That said, the company is still waiting for official ratification of supply from the KPD field, the contribution of which is expected to stand at 47-48mmcfd in total gas allocation to Engro. At the same time, the company is also challenging the price of gas to be supplied with it asking for the price to be set at US$O7/mmbtu, the original price under which Enven was set up. Should the gas rate be fixed at US$O.7/mmbtu, it would [educe Enven’s manufacturing cost by about PkR27O per bag, with a weighted average PkRI5O per bag overall cost reduction for the company.
Future looks bright for other projects: Despite initial hiccups , the company’s other projects are expected to continue faring well in the medium to long run. The Food and Polymer businesses are on an uptrend, while the Power and Terminal businesses are on a stable trajectory. Engro ‘s selection as a preferred bidder for LNG import handling could potentially unlock further value in the Group. While details remain sketchy at the moment! initial reports suggest handling charges at US$O.7/mmbtu for about 200-400mmcfd for a period of 15 years.
Investment Perspective: For full year CY13E, AKD Securities expects the company to post earnings of PkR9S5bn (EPS: PkR1 8.68) followed by a tepid decline to FkR9.3bn (EPS: PkR18.24) in CYI4F as AKD Securities factor in a delay to the long term gas solution. As stated earlier, Engro ‘s valuations could come in for significant revision should a resolution be found to the gas price problem. At current levels, the stock trades at a CYI4F PIE of 9.lx and P/B of 1.0Bx – Neutral!