Equity Analysis /

Egypt Nitrogen Fertilizers: Pressured, yet faring better than Chemical peers

  • Urea market not immune to bearish contagion

  • Cut TPs for Abu Qir and MOPCO mainly on weak pricing, and KIMA on weak pricing, higher debt, and project delay

  • Sector to remain profitable; Multiples support OW recommendation on Abu Qir and MOPCO

Urea market not immune to bearish contagion

Earlier in March, the global urea market seemed resistant to the devastating impact of covid-19 as prices edged up to c.USD260/ton. However, since then, China has begun exporting more fertilizers, and Indian tenders have been weak on the demand side, pressuring prices to current lows of USD200/ton. Market research providers suggest plants could go offline soon in a bid to reduce the supply glut. All things considered, we remain conservative as we assume prices will average USD200/ton for the remainder of the year, bringing 2020’s overall average to USD225/ton. We then assume gradual recovery in urea prices to reach USD260/ton by 2024.

Abu Qir & MOPCO | Weaker pricing hampers sales and margins

We downgrade our FV of Abu Qir to EGP23.00/share, (initially EGP27.10/share), and MOPCO to EGP65.50 (initially EGP82.50/share). Our downwards revision of urea prices dragged down sales and margin estimates for both companies in 2020. We now assume a 5pps YoY gross margin contraction for the two urea producers; we expect an average gross margin of 35% for Abu Qir in FY19/20, and 41% for MOPCO in 2020. Nevertheless, despite the FV downgrades, we maintain our Overweight recommendations for both Abu Qir and MOPCO, on massive valuation gaps of more than 80% following the covid-19 led stock market slump.

KIMA | KIMA 2 kick-off delayed as predicted

We downgrade our FV of KIMA to EGP3.35/share, (down from EGP5.25/share), as we incorporate 1) lower urea prices, 2) higher withdrawn debt, and 3) a delay in KIMA 2’s start date. KIMA 2’s handover date has been delayed amidst the covid-19 situation; we expect the project to start yielding results beginning of FY20/21. We maintain our Equalweight recommendation on KIMA based on fundamentals, including its estimated 55% local quota, and feedstock cost of USD4.5/mmBtu. However, we would like to highlight that in the event the company’s local quota is lifted, or natural gas cost is cut by c.USD1.0/mmBtu, our FV of KIMA would reach EGP4.50-5.50/share.

Sector to remain profitable; Multiples support OW recommendations

So far, the nitrogen fertilizers sector has been marked safe from bottom-line losses during this time of crisis. This alone creates a relatively positive sentiment surrounding the sector, particularly when compared to other commodity markets that have witnessed more severe downturns. Even as we account for a slump in EPS this year, Abu Qir is trading at an attractive 2020e EV/EBITDA of 4.6x, and MOPCO at an even lower 4.3x. As for KIMA, despite the stock’s trading 2020e EV/EBITDA multiple of 21.6x, we believe the stock has the most catalytic potential out of all three companies, so keep an eye out for major changes in fundamentals.