Shifting urea market dynamics; Egyptian producers at an advantage
Urea selling prices vary across different regions, but China’s marginal cost of production had historically set the price floor. Now, with the country’s environmental regulations forcing coal-based producers to exit the market and other concerns clouding the local sector’s outlook, China’s role in the global urea market is diminishing. Hence, looking ahead we believe the marginal cost of production for urea will come from European natural gas-based producers. We assume long-term urea prices at c.USD280/ton for the Black Sea region, with our local producers selling at a premium thanks to Egypt’s cost competitiveness. The country’s abundant supply of natural gas, low gas costs, and logistical advantage give it a significant advantage over European producers.
Abu Qir | New CAN project provides upside
We initiate coverage on Abu Qir (ABUK) with a FV of EGP30.90/share, implying a valuation gap of 27.4%, and an Overweight recommendation. ABUK is Egypt’s largest nitrogen fertilizers producer, offering the most diverse product portfolio. The company’s latest venture into Calcium Ammonium Nitrate (CAN), which is expected to come online in FY2012/22, contributes c.EGP5.24/share to our FV, providing most of the upside at the stock’s current market price. We believe management’s clear strategy focusing on sustainability and constant development is the reason behind ABUK’s consistent performance, which is why ABUK is our top pick for the sector.
MOPCO | Value driven by superior regulatory terms
We initiate coverage on MOPCO (MFPC) with a FV of EGP99.25/share, implying a valuation gap of 62.5%, and an Overweight recommendation. Post its controversial expansion in 2016, MOPCO became the largest urea producer in Egypt. Despite management’s lack of disclosure, the company is renowned for receiving natural gas at a major discount to its peers, as well as abiding by a substantially lower local quota. These advantages drive our FV of MOPCO, making it significantly undervalued at the current market price.
KIMA | Look out for KIMA 2
We initiate coverage on KIMA (EGCH) with a FV of EGP6.12/share, implying a valuation gap of 19.8%, and an Equalweight recommendation. KIMA’s much anticipated KIMA 2 project is expected to commence commercial operations beginning of FY2019/20. We assume the company will receive natural gas at the standard rate of USD4.5/mmBtu, and fulfill the industry’s normal local quota of 55% of its production. Since the project is not yet off the ground, we are keeping an eye out for performance post KIMA 2, to assess whether or not it meets our expectations.