AKD Securities Limited Equity Research – Daily Report

Karachi, January 10, 2018 (PPI-OT): EFERT: Fundamentals drives robust yield

In the backdrop of recent improvement in sector dynamics, we reiterate our liking for EFERT with our revised Dec’18 TP standing at PkR79.9/sh (upside: 14.2%). Notable improvement in company fundamentals include: 1) significant +10%YoY growth in urea offtake during CY17 (characterized by 80bps improvement in its overall market share) coupled with 7% uptick in Urea industry offtake) and 2) reduction in discount offerings on the back of normalization of inventory levels (healthy demand alongwith allowance for exports) and rebound in int’l urea prices. Following this, we revisit our investment case for EFERT incorporating the volumetric uptick in Urea offtake.

Accordingly, we revise up our industry urea offtake forecast by 4% to 5.95mn tons alongwith an upward revision in EFERT’s urea market share to 31.4%/31.9% from 30.5%/31.0% previously for CY18F/CY19F. Our earnings estimates for CY18F/CY19F now stand at PkR8.35/PkR8.74 (revised up by 14%/16%) while our Dec’18 TP goes up by 11% to PkR79.9/sh. Additionally, in the absence of any major future capital expenditure and improved debt profile, we expect EFERT to maintain its dividend payout ratio at ~90% going forward (offering an appealing CY18F dividend yield of 10.7% at current levels).

9MCY17 Results Review: EFERT posted unconsolidated NPAT of PkR6.69bn (EPS: PkR5.01) in 9MCY17 vs. NPAT of PkR5.66bn (EPS: PkR4.25) in 9MCY16, an increase of 18%YoY. Key highlights of the results included: 1) strong 15%YoY growth in topline to PkR51.86bn (includes subsidy) reflecting 27%/30%YoY increase in Urea/imported DAP off-take to ~1.29mn/306k tons and 2) 166bpsYoY jump in GM to 36.1% (includes subsidy). During the year, the company also paid a cash dividend of PkR5.5/sh taking 9MCY17payout 110%.

Demand uptick with improving market share: CY17 depicted improvement for the fertilizer industry – where we witnessed an impressive growth of ~7%YoY in urea offtake standing at its highest level in the last 5yrs (against previous high of 5.92mn tons in CY11). In this regard, EFERT posted significant +10%YoY growth in urea offtake during CY17, characterized by 80bps improvement in its overall market share. Following this, we revisit our investment case for EFERT incorporating the volumetric uptick in Urea offtake.

Accordingly, we revise up our industry urea offtake forecast by 4% to 5.95mn tons alongwith an upward revision in EFERT’s urea market share for CY18F/CY19F.to 31.4%/31.9% vs. 30.5%/31.0% previously. Besides this, the company has also reduced product discounts on the back of impressive industry demand, normalization of inventory levels and rebound in int’l urea prices. Incorporating the aforementioned developments, our earnings estimates for CY18F/CY19F now stand at PkR8.35/PkR8.74 (revised up by 14%/16%) while our Dec’18 TP goes up by 11% to PkR79.9/sh.

Dividend payout at an impressive 90%: In the absence of any major future capital expenditure and improved debt profile, EFERT has been maintain a payout ratio in excess of 100% over the last 2yrs (103%/110% in CY16/9MCY17). We feel the company is likely to keep increasing its dividends (PkR7.5/8.0 per share in CY18F/CY19F) on the back of consistent earnings growth, translating into an attractive D/Y of 10.7% at current levels.

Investment Perspective: After correcting sharply in 1HCY17 (down 28%), the company has recovered strongly (+36% since Jul’17) on improving fundamentals. Going forward, we anticipate further improvement on the back of: 1) normalization of inventory levels post higher demand in Rabi season, 3) rising international pricing dynamics and 4) upward trend in local product prices. In this backdrop, we also expect urea manufacturers to further reduce prevailing high level of discounts in the market (currently hovering around PkR30-60/bag), thus improving margins. Our revised Dec’18 TP for EFERT stands at PkR79.9/sh offering a total return of 24.9% (includes dividend yield of 10.7%) at current levels.

You May Also Like