IGI Securities Limited – Day Break

Karachi, December 20, 2017 (PPI-OT): Fertilizer – EFERT: Strong fundamentals and attractive valuation to keep “BUY” call intact

We have estimated earnings of PKR7.3/share for CY17E on the scrip. As of now, company has attained 9MCY17 earnings of PKR5.01/share (+29%YoY) led by surge (+27%/+30%YoY) in urea and DAP offtake to 1,296/306ktons.

Our calculations take into account multiple factors a) improved sales to keep urea and DAP market share intact, b) ample production capacity (2.3Mn tons) to consistently meet urea demand, c) concessionary feed gas rate keeping margins smooth and d) attractive yield of 7.6% with a payout ratio of 70%.

We have a “BUY” call on EFERT, based on our Dec-18 target price of PKR 84/share, offering +32% upside from its last closing. The company is currently trading at CY18E P/E of 8.9x and offers a dividend yield of 7.8%.

We have estimated earnings of PKR7.3/share for CY17E on the scrip and subsequently our target price to PKR 84.3/share offering +32% upside. Our calculations take into account multiple factors a) improved sales to keep urea and DAP market share intact, b) ample production capacity (2.3Mn tons) to consistently meet urea demand, c) concessionary feed gas rate keeping margins smooth and d) attractive yield of 7.6% with a payout ratio of 70%.

Earnings estimated to climb by+8%YoY to PKR 7.3/share; offtake expected at 2.6k tons

As of now, company has attained 9MCY17 earnings of PKR5.01/share (+29%YoY) led by surge (+27%/+30%YoY) in urea and DAP offtake to 1,296/306ktons. For urea, exports in particular (256ktons) have also boosted company’s earnings during the period. Henceforth, we expect earnings to climb by +8% YoY to PKR7.3/share based on the estimated offtakes of urea and Dap, tuning at 1.8k tons (+8%YoY) and 475k tons (10%YoY), respectively. In addition, our calculations incorporate Np/NPK offtake at 55/60ktons for CY17.

Market share to remain steadfast in urea and DAP

Over the years the company has attained favourable market share in primary products (Urea and DAP). As of now, the company is the second most in capturing 31% share in urea market, while for DAP the share stands moderately at 25%. Going forward, taking conservative approach we expect company to maintain its share in urea and DAP market at current levels. Although, LNG based fertilizer manufactures remain an imminent threat in case of urea, however we expect minimal impact as of now owing to closure of plants.

Operating capacity to run at maximum levels: enVen plant supporting the offtake

The company has sufficient capacity of 2.3Mn tons to produce urea, having two operating plants each having a capacity of 975k tons and 1.2Mn tons (enVen). The enVen plant incorporated under the Fertilizer policy 2001 is utilized at maximum levels (consistent gas supply at concessionary rate). Henceforth, we expect company to continue utilizing its enVen plant at maximum level of 97%, whereas the old plant to remain operational at 55%.

Pricing dynamics and concessionary feed rate to keep margins intact

The company enjoys competitive advantage in bearing low feed cost owing to low tariff rate ($0.70/mmbtu) as per the fertilizer policy. As a result, the company is able to garner some support in margins which over the past two years have compressed (600 bps on average) amid decline in local urea and DAP prices. On international front, DAP prices have increased (USD 365/bag) owing to limited supply from China and increase in raw material costs. As a result, we see DAP margins squeezing on average at PKR 56/bag during the period. Although globally, new supply additions will keep DAP prices bearish but the overall effect will be countered by PKR depreciation. Nevertheless, we have increased DAP prices by 3.4% to counter the effect. Similarly, we have also increased urea prices by 3.4% stemming from increase in gas prices. Overall effect, will result in margins to hover around at 29%.

High payout ratio offering attractive yield of 7.6% on average

Taking in to account 3 year average we estimate company to plow out 70% of its income at a dividend yield of 7.6%. We expect company to utilize the retained earnings in meeting debt repayments, which are expected to retire by CY21.

Recommendations

We have a “BUY” call on EFERT, based on our Dec-18 target price of PKR 85/share, offering +32% upside from its last closing. The company is currently trading at CY18E P/E of 8.9x and offers a dividend yield of 7.8%.

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