Equity Analysis /
Pakistan

Engro Corporation: 2Q 19 results – Good jump in earnings and payout

    Intermarket Securities
    20 August 2019

    Engro Corporation (ENGRO) announced 2QCY19 consolidated NPAT of PKR2.9bn (EPS: PKR4.97) as compared to PKR1.9bn (EPS: PKR3.29) in SPLY, up by 51% yoy. This takes the 1HCY19 profitability to PKR6.9bn (EPS: PKR11.93), up 13% yoy. The result announcement was accompanied with an interim cash dividend of PKR8.0/sh, taking cumulative 1HCY19 payout to PKR15.0/sh. We have a Buy recommendation and a target price of PKR345.

    Key highlights include:

    • Fertilizer segment of ENGRO (EFERT) posted 2QCY19 NPAT of PKR3.2bn (EPS: PKR2.38), down 3% yoy. The 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) and (ii) 3.4x yoy increase in finance cost amid higher debt and interest rates.
    • For its Polymer division, EPCL’s profitability declined by 66% yoy to PKR447mn in 2QCY19, despite improved core delta, as a result of  (i) implication of IFRS16 (negative impact of PKR0.42/sh), (ii) lower GMs owing to higher gas prices and purchase of expensive EDC, and (iii) marginal decline in Caustic and PVC sales.
    • Finance cost of the company increased by 2.6x yoy to PKR3.1bn as compared to PKR1.2bn in corresponding period last year on the back of higher interest bearing debt and increasing interest rates.
    • Engro’s Thar project, namely EPTL (c. 50% stake) and SECMC (c. 12% stake) has achieved CoD. This will provide impetus to the earnings in 2HCY19. 

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