EFERT; Low feed gas price to upscale return potential by 110% - BUY! As per media reports, the Economic Coordination Committee (ECC), after recommendation of the Ministry of Law as well as the Ministry of Petroleum and Natural Resources, has decided that the concessionary period (of 10 years) for providing gas to Engro Fertilizer (EFERT) would be extended by the number of days for which SNGPL was not able to provide gas to EFERT for EnVen plant. Concessionary gas Impact: Target price to jump by 71% Clarity is yet to emerge regarding the timeline of concessionary gas availability. As per our estimates, earnings and target price of EFERT is expected to jump by 59% and 71%, respectively if the company gets gas from CY15, post implementation of long term gas plan. Our earnings estimates and target price would further boost by 59% and 79% if concessionary gas is available in CY14. Following table summarizes both of the scenarios. Feed gas at USc 70/mmbtu in CY15 Key assumptions • Base plant operational from 4QCY14 at 85% capacity utilization. • EnVen operational at 90% capacity utilization. • Gas price would be USD 0.7/mmbtu from CY15 onwards for EnVen and PKR 423.4/mmbtu for base plant, respectively. • Urea prices assumed at PKR 1,785/bag in CY14 and 2.5% per year growth going forward. Feed gas at USc 70/mmbtu in CY14 Key assumptions • Base plant operational from 4QCY14 at 85% capacity utilization. • EnVen operational at 90% capacity utilization. • Gas price would be USD 0.7/mmbtu from 2QCY14 onwards for EnVen and PKR 423.4/mmbtu for base plant. • Urea prices assumed at PKR 1,785/bag in CY14 and 2.5% per year growth going forward. Pricing scenario, imported urea expected to be revised upward Furthermore, it was also directed that imported urea be sold at parity with the local urea, which we believe will lead NFML to raise urea prices by PKR 110/bag to PKR 1,785/bag. Our view stems from the fact that after providing gas supply to EFERT at USc 70/mmbtu, gov’t is expected to bear annual subsidy of ~PKR 11bn. In addition, since int’l urea prices are trending upward, which coupled with PKR depreciating is also expected to cumulatively translate into higher urea prices (landed cost) going forward. Current subsidy on imported urea stands at PKR 737/bag translating into annual subsidy of PKR 14.7bn on 1mn ton of imports. Recommendation We reiterate our ‘BUY’ recommendation on Engro Corp (ENGRO) with our Jun’14 end price target at PKR 255/share, with an upside potential of 50% from current levels. Our Jun`14 price objective for EFERT under the base case assumption (feed gas at USc 70/mmbtu from CY15 onwards) works out to be PKR 59.39/share, offering a massive upside potential of 110% from the strike price that has clocked in at PKR 28.25/share.
Posted on: Mon, 20 Jan 2014 07:06:48 +0000
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