Topline declines on global urea price lows and EGP appreciation
Misr Fertilizers Production Company (MOPCO) released its audited financials for 2Q19, reporting sales of EGP2,015 million (-15% QoQ, +4% YoY). Similar to its peers, management indicated that MOPCO’s QoQ sales drop came mainly on the back of lower prices. The Egypt Urea Spot Price Index had fallen to an average of just USD262/ton (-18% QoQ, -1% YoY) for 1Q19. It is also worth noting that, given that c.80% of MOPCO’s sales is exports, we presume the company’s reported revenues for 2Q19 were negatively affected both on a QoQ and YoY basis by the EGP appreciation against the USD. Hence we presume the slightly higher sales on an annual basis was mainly the result of higher volumes.
Gross margin corrects upwards despite sequentially lower sales
Gross profit for 2Q19 stood at EGP990 million, translating to a gross margin of 49% (+4pps QoQ, flat YoY). Despite the sequential decline in revenues, MOPCO’s gross margins managed to recover to a more normalized level this quarter. This reassures us that the strain on margins in 1Q19 to reach 46% was mainly due to some one-off costs, and hence MOPCO should be able to attain our average gross margin estimate of 49% for 2019.
Profitability improves; effective tax rate finally normalizing?
MOPCO’s net profit for 2Q19 amounted to EGP503 million, which translates to a net margin of 25% (+6pps QoQ, +3pps YoY). The 6pps jump in net margin QoQ was supported by lower interest expense as the company reported financing costs of EGP356 million in 2Q19, vs. EGP404 million in 1Q19, as well as lower income taxes as MOPCO’s effective tax rate averaged just 17% for 2Q19, vs. 31% in 1Q19. On an annual basis, the margin expansion was mainly the result of the lower effective tax rate, as 2Q18’s tax rate averaged c.30%.
We presume this quarter’s low tax rate of 17% was an adjustment to bring 1H19’s average tax rate down to 24%. This leads us to believe that MOPCO’s tax issues are finally being resolved, and hence its effective tax rate is normalizing downwards towards the official rate of 22.5%, as we had assumed for this year.
Maintain Overweight on FV of EGP99.25/share
As things stand for 1H19, we believe MOPCO’s sales of EGP4,373 million has put the company on track to achieve our topline estimate of EGP8,866 million for the year. However, we are wary that MOPCO’s bottom line could come short of our 2019 estimate of EGP2,442 million (pre-employee profit share). The company’s higher-than-anticipated interest expense, as well as 1Q19’s one-off costs and high tax rate, led the company to record just EGP938 million of net profit in 1H19.
We expect slightly improved to steady performance next quarter as global urea prices have witnessed a slight uptick, averaging USD273/ton (+5%QoQ, +10% YoY) for 2Q19. We remain Overweight on the stock at a FV of EGP99.25/share. MOPCO is currently trading at a 2019e EV/EBITDA of 4.8x; a discount to ABUK’s 6.4x, KIMA’s 7.0x, and MOPCO’s own historical average of 6.4x.