Equity Analysis /
Pakistan

Engro Corporation: 1HCY19 analyst briefing takeaways

    Intermarket Securities
    26 August 2019

    ENGRO held its analyst briefing on 23 August 2019 to discuss the financial performance during 1HCY19. The profitability of the company was up by 13%yoy to PKR6.9bn (EPS: PKR11.93) during 1HCY19 as compared to PKR6.1bn (EPS: PKR10.57) during 1HCY18. The revenue grew by 20%yoy in 1HCY19 to PKR85.9bn, mainly on account of (i) higher realized urea prices, (ii) increase in PVC prices and (ii) volumetric growth in terminal businesses. The company announced a cash dividend of PKR8.0/sh in 2QCY19, taking the 1HCY19 payout to PKR15.0/sh.

    Fertilizer 

    • Fertilizer segment posted 1HCY19 NPAT of PKR7.2bn (EPS: PKR5.38), flattish yoy. Despite improved retention prices of urea, drag in earnings was mainly observed on account of (i) 48% effective tax rates (owing to partial reversal i.e. PKR800mn of deferred tax gain booked in CY18 on account of revised corporate tax rates), (ii) 3.4x yoy increase in finance cost amid higher debt and interest rates, and (iii) lower offtake.
    • GIDC resolution remains the key for settlement of (i) long outstanding subsidy claims, and (ii) adjustment for increase in gas prices.

    Polymer

    • The profitability of Polymer segment was down by 45%yoy to PKR1.5bn in 1HCY19 as compared to PKR2.8bn in same period last year, led by (i) implication of IFRS16 (negative impact of PKR0.41/sh), (ii) lower GMs owing to higher gas prices and purchase of expensive EDC, and (iii) one-off gains related to insurance and tax recognized in prior period.
    • PVC demand may taper off in the short term due to a contraction in the economy. However, long term prospects remain intact.
    • The company is on track to achieve commercial operations of its PVC plant (expansion of 100k tons) in 3QCY20.

    Terminals

    • EVOPAK handled 686k tons of chemicals in 1HCY19 as compared to 649k tons in the same period last year, up by 6%yoy, mainly attributable to higher import of Phosphoric acid. The company maintained its market share at 70% during 1HCY19. The Elengy Terminal operated at 100% capacity, handling 36 cargoes during 1HCY19 (flat yoy).

    Investment projects

    • SECMC and Thar power project (660MW) has successfully achieved CoD in Jul’19. The plants are running smoothly and likely to add significant earnings contribution. The dividend streams can be expected from the end of CY20. However, circular debt remains the key challenge.
    • Engro Enfrashare acquired 1,500 towers from Jazz during the period and plans to lease out the towers to other CMOs on a built-to-suit basis.
    • Feasibility study on polypropylene dehydrogenation project is still under progress; which if implemented, will require a significant capital investment.

    Risks: (i) High recurring developmental expenditures, and (ii) lack of clarity on investment projects.