Morning Call about – Engro Fertilizer Limited Fertilizer Much awaited IPO @ PKR 20/share, Subscribe! – Arif Habib Limited
Karachi, November 11, 2013 (PPI-OT): Engro Fertilizers Limited (EFERT) is issuing 75mn ordinary shares, from which 56.25mn shares (75% of the total issue) will be offered through book-building mechanism at a floor price of PKR 20/share whereas the remaining 18.75mn (25% of the total issue) will be offered to the general public at the strike price to be determined through the book-building mechanism.
According to Arif Habib Limited in addition to the aforementioned transaction, Engro Corporation Limited (ENGRO) aims to divest its existing shareholding up to 30mn shares in the company at the strike price determined by the same book-building.
Offtake expected to jump 4% and 19% in CY14 and CY15 respectively The company’s offtake is expected to jump 4% YoY in CY14 and a massive 19% in CY15 due to better production post long-term gas plan materialization. Furthermore, Guddu gas is expected to lift the company’s production till Mar-14.
Growth story – GP margins to hover ~41% and PAT to jump 21% CAGR The Guddu gas flows along with the long-term gas plan, bodes well for the company, as gross margins are expected to clock in at CY13-16 average of a fat 41%. Furthermore, with both of the plants fully operational from 4QCY14 onwards, the PAT of the company is expected to jump 4-year CAGR of 21%.
Financial highlights CY12A CY13E CY14F CY15F CY16F Net Revenues 30,627 48,842 49,373 58,590 61,401 Net Profit (2,935) 5,019 5,339 7,733 8,935 EPS (PKR) @ 1298mn shares (2.74) 4.10 4.11 5.96 6.89 DPS (PKR) - - - 2.0 3.0 Div yield - - - 10% 15% P/E (x) n.m 4.87 4.86 3.36 2.90 P/B (x) n.m 1.24 0.90 0.76 0.66 ROE -19% 27% 21% 25% 24% ROA -3% 5% 5% 8% 10% Source: Company accounts and AHL Research
Strong cash flow generation ahead – dividend expected in CY15F Arif Habib Limited foresees strong cash flow generation amid higher capacity utilization coupled with stable urea prices. Arif Habib Limited analysis suggests that, in CY15F, the company’s cash position will be strong enough to declare dividend after fulfilling the IFC requirement of retiring 33% of its senior debt.
No more worries – Debt restructuring approved
The company’s debt restructuring has been approved with all the lenders. The principle payments of the senior debt as at Jun-12 have been deferred by 2.5 years, which provides the company with enough time cushion to build cash.
Risk mitigated – Long term plan, gas fumes to be owned by the company Company’s Gas Sale Agreements (GSAs) with KPD, Reti Maru and Makori East are intact. Currently, the company is drawing gas from MARI SML (~20mmcfd), while Reti Maru (~12mmcfd) flow is expected by the end of this year (CY13).
Recommendation – Subscribe!
Arif Habib Limited, DCF-based fair value for the company worked out to PKR 32.8/share, translating into a massive upside potential of 64% from the floor price. The company is expected to be able to declare cash dividends by the end of CY15. Thus, Arif Habib Limited, recommended ‘Subscribe’ for the upcoming IPO of EFERT.