Equity Analysis /

Nitrogen Fertilizers 2020 update – Losing ground; catalysts needed for revival

    Al Ahly Pharos Securities Brokerage
    22 December 2019

    Urea prices slump on heavy supply

    Global urea prices averaged USD225/ton for November, losing as much as USD80/ton YoY. Prices came under pressure recently as a result of rising supply, despite support from huge Indian tenders on the demand side. China seems to be regaining its footing in the export market as the country’s urea exports for 3Q19 more than tripled, both on a QoQ and YoY basis, to 1.5 mn tons. Iran is also making a comeback, as the country has been able to circumvent US sanctions and push product at sharp discounts to non-traditional markets. Given recent developments in the global market, we do not expect to see any dramatic recovery in urea prices next year. We assume prices will average USD250/ton in 2020, similar to the current YTD average.

    Abu Qir & MOPCO: Pressured by FX rate and urea prices but long-term potential remains

    We downgrade our FV of Abu Qir to EGP27.10/share, (initially EGP30.90/share), and MOPCO to EGP82.50/share (initially EGP99.25/share), but maintain our Overweight recommendation on both stocks. Both companies were mainly downgraded on the back of a more conservative urea price outlook given the recent downturn, and updated FX rate assumptions that reflect EGP strength. Given that exports account for the bulk of revenues at both Abu Qir and MOPCO, a stronger EGP results in significantly lower cash flows for the two companies. All-in-all, despite the downgrades and near-term expectations of poor performance, we still see long-term value in Abu Qir and MOPCO.

    KIMA: Expect short-term rally on KIMA 2

    We downgrade our FV of KIMA to EGP5.25/share, down from EGP6.12/share, as we incorporate 1) more conservative urea prices, 2) increased debt, and 3) slightly higher capex for KIMA 1’s rehabilitation; USD150 million up from an initial estimate of USD130 million. While we maintain our Equalweight recommendation on the stock, we believe KIMA 2’s first full set of results could trigger a rally in share price as the company sees a massive jump in sales coming from a low base. Therefore, we recommend having exposure to KIMA ahead of the release of 2Q FY2019/20 results.

    Potential catalysts to unlock major upside

    In light of recent governmental actions taken to support the industrial sector, we believe the local fertilizers sector could be next in line to receive incentives. The fixed natural gas cost for the sector of USD4.5/mmBtu has become skewed towards the high end of the spectrum, following the recent crash in European natural gas prices. Therefore we believe the sector could use some support either in the form of a cut in feedstock cost, or market liberalization. We believe KIMA is in prime position to benefit from either scenario, while Abu Qir would benefit much more from a cut in natural gas cost than market liberalization. Given MOPCO’s already low gas cost, the company only stands to benefit if its local quota is revoked. Please refer to page 2 of our report for more details on the effect of different scenarios on each company.