ENGRO: Value to unlock soon – Elixir Research
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Problems with flagship fertilizer business have led to underperformance…
Since Jan-11 to date, ENGRO has underperformed KSE-100 by a hefty 55% as gas supply to the company’s USD1.1bn expansion, Enven, was cut by ~90%. This dragged ENGRO’s EPS from PKR12.6 in CY10 to PKR2.6 in CY12. Investors remained watchful of gas supply problems, and potential of other businesses owned by ENGRO was largely ignored.
…but intrinsic value has been growing
In second quarter of every fiscal year, HUBC receives generation bonus for attaining higher utilization levels (above 65%) of its old hub plant. This bonus is calculated on the basis of calendar year generation numbers. We expect generation bonus for CY12 generation at PKR336mn (PKR0.32/share), up 10% YoY, primarily due to higher indexation factor as utilization remained close to CY11 levels. Hub plant’s generation for 4QCY12 is expected at 1,803Gwh, at a load factor of 68%, which shall take CY12 generation to 8,062Gwh, up a mere 0.2% YoY, at a load factor of 77%.
PCE to rise by 13% YoY
Project Company Equity (return component under tariff) of Hub plant is estimated to rise by 13% YoY, primarily due to 10% increase in indexation factor as unindexed return component would rise by 3% YoY. Steep rise in indexation factor is estimated on account of 7% PKR deprecation during FY12 (applicable for 1HFY13) along with 3% growth in US CPI during CY11 (applicable for 2HFY12 and 1HFY13).
Strong performance to continue
HUBC has outperformed KSE100 index by 5% since our call (Refer to our report titled “HUBC – Price laggard recently; should outperform now”, dated August 31, 2012). We believe this strong performance shall continue going forward as the stock still offers attractive dividend yield of 14% along with an upside of 35% to our Dec-13 PT of PKR69/share. BUY!