Engro Fertilizer still enjoys strong fundamentals

Engro2After posting commendable earnings performance for CY15, the pace of earnings growth is now likely to come off for EFERT for CY16 where analysts see a decline of 14%YoY and more measured 3-year earnings CAGR of 6%. The challenges facing the company during CY16 are: 1) persistence of sluggish trend in urea sales where analysts expect offtake for CY16 to fall to 1.73 million tons as compared to 1.88 million tons for CY15, down 8%YoY, 2) concerns on pricing power of local players as international urea prices continue to remain low on excess supplies amid weakening demand, down 26% FYTD to US$236/tons, and 3) heavy dealer discount offered to clear out high inventory levels where Jan’16 ending urea inventory was reported at 663,000 tons. While overall fertilizer sector outlook remains bleak, EFERT remains top pick of analysts within the fertilizer sector primarily on account of concessionary gas pricing for Enven Plant and swift deleveraging resulting in significant finance cost saving and integration of DAP business (CY15 offtake was 391,000 tons, which constituted a 22% market share in the industry). Furthermore, analysts disregard concerns on gas availability and expect gas supply to continue for both plants in CY16 in the light of the recent ECC decision (CY16 capacity utilization at 82%). EFERT has lost 17% CYTD, where the underperformance was more on account of developments in the parent company (stake sell off by ENGRO) and news regarding non‐availability of gas. Disregarding both, there are reasons to take new positions in EFERT at current levels.


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