EFERT: Concessionary gas rate approved As per news reports, the GoP has finally dealt with the long standing issue pertaining to feedstock price for Engros Enven plant. In this regard, the Economic Coordination Committee (ECC) has approved gas at the rate of US$0.7/mmbtu for Engro Fertilizers on the gas it obtains from the SNGP system. Recall that currently both Engro plants are running on the Mari network. On an annualized basis, assuming 80% utilization for the Enven plant and holding everything else constant, this will translate into an incremental earnings benefit of PkR3.9bn (EPS impact: PkR3.04) for Engro Fertilizer (EFERT). That said, supply of gas remains a key issue where ratification of the Kunnar Pasakhi Deep (KPD) pipeline still remains a question mark. Currently, our full year EPS estimate for EFERT in full year CY14F stands at PkR3.66, where running the Enven plant on subsidized gas rate increases our NPAT estimate to PkR6.7bn (EPS: PkR5.65). Assuming Enven utilization at 80% in CY15F increases our earning estimate to PkR12.4bn (EPS: PkR9.5) from previous PkR6.3bn (EPS: PkR4.8). That said, as a consequence of the feedstock rate reduction, we believe the management will likely have to pass on benefit in the form of reduced urea prices when the discounted gas rate becomes effective which will trim the incremental benefit. The GoP finally makes a decision! The GoP has finally shown its hand with the ECC ruling in favor of Engro Fertilizer with regards to gas pricing. On a per bag basis, this translates into a cost reduction of PkR270.9 for the Enven plant, with a weighted average cost reduction of PkR150/bag for Engro Fertilizers as a whole. Ceteris paribus, this translates into an incremental earnings impact of PKR3.95bn (EPS impact: PkR3.04) at current feed rates (including GIDC). Some key question marks, however, remain with it being unclear whether the rate will be applicable on gas provided through the SNGP network or will the Mari network gas currently being provided to Enven also fall into the ambit of the concessionary rate. Currently, the plant is running on Mari network which is expected to continue till Jul14 when the Guddu Power plant is expected to come online. But the KPD issue lingers on: While the concessionary gas issue has finally been put to rest, the GoP remains mum on ratification of the KPD pipeline. The market has cheered the concessionary rate on Engro Fertilizers, with the scrip opening at upper cap on its first day of trading, however, we believe the market is underplaying the KPD issue. Recall that KPD accounts for about 47mmcfd of total 79mmcfd allocated to Engro Fertilizers under the long term gas solution program. Investment Perspective: The timing of the decision on concessionary gas rate for Engro Fertilizers has been immaculate with today (Jan 1714) being the first day of trading post its IPO. Consequently, the scrip has opened the day on its upper cap where the coming few days are likely to see continued buying interest in the scrip. Our target price (prior to the decision on gas price) for EFERT stood at PkR29.3/share, where adjusting for concessionary rates, our TP becomes PkR55.5/share, all else the same. That said, our TP could again come in for some revision if and when EFERT passes on the benefit of lower gas prices in the form of reduced urea price. At the same time, revision in TP for EFERT leads to a revision in our SoTP based TP of Engro Corp. (ENGRO) to PkR196.2/share from previous 159.6/share.
Posted on: Fri, 17 Jan 2014 08:40:33 +0000