By: Muhammad Awais Ashraf
92 21 5612290Ext 339
Foundation Securities (Pvt) Limited
Based on company’s improved 3QCY14 earnings, accelerated deleveraging and clarity on concessionary gas, we have revisited our investment case for Engro Fertilizer (EFERT). Upside to our thesis comes from extended flows from Guddu (base case Dec’14). Furthermore, the company has met its dividend related financial covenant to IFC (33% of senior debt repaid) which increases the probability of earlier than expected dividend payout.
We hold a favorable view on the stock with a TP of PKR74.4/sh, suggesting implied CY15 P/E of 7.8x. Possible downside risk to stock performance may come from increase in market float of the stock, in our view.
Improved gas scenario: Earlier the additional flows from Mari (designated for Guddu power plant) were expected to come till Jun’14, but lower utilization of the power plant extended the gas availability for the company up till now. We believe there is an increased possibility of the aforementioned flows to remain intact given 1) lower than earlier estimated demand from Guddu power plant and 2) government’s priority to local urea production (to get some relief on its import bill along with reduction in subsidy disbursement). However, being conservative we have not incorporated the flows beyond Dec’14. Our initial working suggests a positive CY15 EPS impact of PKR3.6/sh and may push up our TP to PKR78 based on continuation of flows.