Earnings Report /
Egypt

Abu Qir Fertilizers: Q2 19/20 review – High volumes conceal impact of Urea price weakness

    Al Ahly Pharos Securities Brokerage
    13 February 2020

    Sales steady thanks to Abu Qir 2’s volume ramp-up

    Abu Qir released its audited financials for 2Q19/20, recording revenue of EGP2,010 million (+1% QoQ, +1% YoY). As we had initially assumed, management indicated that the slight QoQ improvement is owed to higher volumes at Abu Qir 2, following the 20-day maintenance shutdown during 1Q19/20, offsetting overall price weakness for all products. Abu Qir 2 recorded a 32% QoQ jump in its sales alone this quarter, which we believe is a reflection of the volume ramp-up. On a YoY basis, we also believe the slight increase in sales came on the back of volume growth offsetting a 9% YoY decline in global urea prices as well as EGP appreciation of 10% YoY.

    Gross margins steady QoQ, contract YoY due to weak global pricing

    Gross profit for the quarter stood at EGP754 million, translating to a gross margin of 38% (flat QoQ, -4pps YoY). We believe the QoQ margin stability and YoY margin pressure are mainly reflections of urea price movements as the Egypt Urea Spot Index averaged USD272/ton for last quarter (-1% QoQ, -9% YoY) before dropping to current levels of USD240/ton. Hence, we assume Abu Qir was selling urea at steady to slightly lower prices than 1Q19/20, but at much lower prices than 2Q18/19 hence the 4pps YoY margin contraction.

    Profitability down on lower t-bills balance QoQ; absence of FX gains YoY

    Abu Qir’s net profit amounted to EGP688 million, translating to a net margin of 34% (-4pps QoQ, -11pps YoY). The company’s financial statements show that its bottom line was affected QoQ by lower return from treasury bills, as the company sold almost EGP1.5 billion worth of treasury bills during 2Q19/20. On an annual basis however, the 11pps margin contraction is mainly due to a high base effect as 2Q18/19 results included c.EGP216 million of FX gains, compared to none this quarter.

    Maintain Overweight on FV of EGP27.10

    Having downgraded, earlier this year, our assumptions of urea prices for the year, we believe Abu Qir is on track to meet our expectations. The company has so far recorded sales of EGP4.0 billion and a bottom line of EGP1.4 billion as of 1H19/20. Hence, we believe our estimates of EGP8.0 billion in sales and EGP2.7 billion in net profit for the year will be attainable, even if the company stumbles over the second half of the year due to weak urea pricing.

    Abu Qir is currently trading at a 19/20e EV/EBITDA of 6.7x; a discount to its historical average of 9.0x. As for Abu Qir’s local peers, KIMA is trading at a 19/20e EV/EBITDA of 10.3x, a significant premium to Abu Qir, but MOPCO is trading at a 2020e EV/EBITDA of 4.8x, a discount to Abu Qir.