Quarterly sales hit by global urea price lows
Abu Qir Fertilizers released its audited financials for 4Q18/19, recording sales of EGP2,091 million (-11% QoQ, +12% YoY). The Egypt Urea Spot Price Index fell to an average of just USD262/ton (-18% QoQ, -1% YoY) for 3Q18/19, which we presume was the reason behind the QoQ drop in sales witnessed this quarter. We also believe the company’s USD-based export sales were negatively affected by the stronger EGP.
On a full-year basis, we had accounted for a relatively weak 4Q18/19 in our estimates for Abu Qir, and hence the company’s revenue for the fiscal year more or less met our expectations, with sales recording EGP8,585 million (+14% YoY). The strong YoY growth in full-year sales can mainly be attributed to Abu Qir 3’s sales of treated granular urea, where utilization rates surged to reach 116% (+19.5% YoY). It is also worthy to note that in FY18/19, Abu Qir continued to fulfill its local quota mostly using Ammonium Nitrate (AN) to maintain a more profitable revenue mix.
Gross margins fall; 4Q usually a low point due to increased costs
This quarter’s gross margin dropped significantly to reach just 33% (-10pps QoQ, +6pps YoY). We believe the slump came on the back of two main factors; lower selling prices, and a jump in salaries and wages which is witnessed in 4Q of each year and is hence not alarming as it has proven to be seasonal.
The fourth quarter’s low margins brought down Abu Qir’s average gross margin for FY18/19 to 40%; below our estimate of 42%. Nevertheless the company continued to report growth relative to last year, recording a 5pps increase in gross margins from FY17/18, mainly on higher average prices for nitrogen fertilizers.
Profitability subsequently pressured for the quarter
On the bottom line level, Abu Qir recorded just EGP561 million, translating to a net margin of 27% (-13pps QoQ, +1pp YoY). It is worth noting that the 13pps QoQ margin contraction is not only the result of lower prices and increased costs filtering down, but it is also due to a high base effect as 3Q18/19 had witnessed a non-recurring gain of EGP151 million as return on investments available for sale.
Weakness in the fourth quarter brought down ABUK’s net margin to an average of 37% for FY18/19, which came in 2pps below our estimate of 38%. However, the company’s overall profitability did witness improvement compared to FY17/18, with net margins expanding 5pps YoY.
Still a great year; Maintain Overweight on FV of EGP30.90/share
Overall, Abu Qir delivered robust growth over the course of FY18/19, and we expect its consistent performance to continue throughout FY19/20. We expect steady to slightly weak results for 1Q19/20, as an exception to the year, as the Egypt Urea Spot Price Index only increased slightly to average USD274/ton for 4Q18/19 (+4.5% QoQ, +9.9% YoY), and we expect a drop in sales volumes of AN on the back of the announced 25-day shutdown at Abu Qir 2.
The company has been making progress towards its Calcium Ammonium Nitrate (CAN) project, which we remind you is the basis of our Overweight recommendation. Abu Qir is currently awaiting approval of the c.EGP5 billion loan proposal to finance the expansion entirely in debt. Our FV currently incorporates capex of c.EGP4.6 billion for the CAN project, hence we re-iterate that the slightly higher estimate of c.EGP5 billion will not have a material impact on our valuation.
We remain Overweight on the stock at a FV of EGP30.90/share. Abu Qir is currently trading at a 19/20e EV/EBITDA of 6.1x, a premium to MOPCO’s 2020e 4.8x, but at a discount to KIMA’s 19/20e 7.0x and Abu Qir’s own historical average of 9.1x.