Karachi, June 22, 2021 (PPI-OT): EFERT: Price hikes outweigh potential concessionary GSA end

We revisit our investment case on Engro Fertilizers Ltd, incorporating (i) urea price of PkR1,675 per bag for CY21F onwards, (ii) non-concessionary gas rates from 3QCY21 onwards and, (iii) unwinding of discount on GIDC provision over CY21-24F.To recall, EFERT recorded GIDC re-measurement impact of PkR2.12bn in 4QCY20, as per IFRS 9, which is expected to be unwound over CY21-24F.

On pricing front, EFERT announced urea prices hike of PKR50/bag w.e.f 11th Jan’21, taking the cumulative hike to PkR75/bag since Aug’20. Relaxation on disallowing 10% expense on sales to unregistered dealers and, price hike sustaining despite build up in inventory, has led us to incorporate urea price hike in our estimates.

Despite higher gas price incorporated, healthy EBITDA generation over investment horizon ensures EFERT’s ability to maintain dividend yield north of 12%. At our revised TP of PkR69.1/sh, EFERT offers a total return of 13.8% at last close, implying a Neutral stance, where a downward revision in urea price is a downside risk.