Equity Analysis /
Egypt

Nitrogen Fertilizers: Valuation update – once in a lifetime year ahead

  • Local quota prices adjusted to narrow the gap with international prices and in tandem with recent hike in gas cost

  • Abu Qir Fertilizers: Stellar performance expected in FY21/22, supported by surge in prices

  • MOPCO: Long-term feedstock pricing uncertainty lingers; Hopes for high yield ended by new project announcement

Omar Attia
Al Ahly Pharos Securities Brokerage
21 November 2021

Local quota prices and volumes adjusted to narrow the gap with international prices and in tandem with recent hike in gas cost 

In a move to narrow the gap between local quota fertilizer prices and international pries, nitrogenous fertilizer producers are now required to supply 55% of their production to the Ministry of Agriculture, a percentage equivalent to about 3.7 million tons annually, which covers the demand of the local market. Local prices have been raised from EGP2,900 per ton to EGP4,500 per ton for Urea, and we assume it to be around EGP4,400 per ton of Calcium Ammonium Nitrate. The decision also obligated companies to pump 10% of their production for sale at international prices, denominated in local currency, in the local market, to ensure availability of supply that matches local demand. To ensure the new requirements are being met, The Egyptian Customs Authority will not allow fertilizer producers to export any production volumes, except with a letter from the Ministry of Agriculture stating that the producer did meet the local quota (65%). This means that companies will be allowed to export 35% of production.  Accordingly, we have updated our models to reflect the new local prices and new local quota requirements. 

Urea market rally continues; We assume gradual normalization over five years  

Just as the pandemic dragged Urea prices in early 2020, it appears to have completely turned a corner and grew into a contributor to the rally, albeit in an implicit way as prices hit (USD950/ ton in Egypt, USD875/ton in Europe, USD750/ton in North America and lastly USD625/ton in China). Prices have been buoyed by several factors, including: i) the ensuing energy crunch in Asia and Europe, which forced major urea producers to scale back production, and in some cases, cease production entirely as producers grappled with mounting feedstock costs, ii) supply cuts from China as authorities opted to divert natural gas to households rather than urea producers and cut back on coal usage in fertilizer production in a bid to meet environmental targets, iii) tight export volumes from China as meeting local demand remains a top priority for the Chinese authorities, and iv) sustained favourable crop prices. We are forecasting Urea prices of USD575/ton in 2022, USD450/ton in 2023, which gradually normalize until USD325/ton in 2026. 

Abu Qir Fertilizers: Stellar performance expected in FY21/22, supported by a surge in prices 

We upgrade our FV to EGP29.00/share, with an Overweight recommendation. We incorporated the following changes to our projections: i) an upward revision for urea prices over the forecast horizon (2022-2026), especially for the local quota volumes; ii) an updated timeline for the Abu Qir 3 expansion, which should reflect on ABUK’s sales figures by FY24/25; and iii) an upward revision of ABUK’s feedstock pricing which as per the recent natural gas price hikes, without assuming future changes with urea price changes. Given the current surge in urea prices, we anticipate ABUK to report an FY21/22 topline figure of EGP15,101 million (+71% YoY) and a bottom-line figure of EGP6,568 million (+87% YoY).  We assume that the current feedstock cost and local quote prices do not change from the current levels.  With regards to ABUK’s methanol project and the potential Calcium Ammonium Nitrate (CAN) projects, we opted to exclude them from our valuation given that the company is yet to break ground on either project and given the current lack of visibility on margins for either project. ABUK recently disclosed that they have signed a shareholders’ agreement to establish Misr Methanol and Petrochemicals Company, in which it will hold a 35% stake. An agreement between ABUK and the ministry of petroleum on feedstock pricing to the project is yet to be officially struck, and feedstock cost will probably be adjusted, especially after the recent gas hikes. ABUK is trading at FY21/22 P/E of 4.5x and EV/EBITDA of 2.1x. 

MOPCO: Long-term feedstock pricing uncertainty lingers; Hopes for high yield ended by new project announcement 

We upgrade our FV on MFPC to EGP120.80/share, with an Overweight recommendation. Our FV integrates higher urea selling prices for MOPCO and maintains feedstock pricing formula over the forecast horizon (2022-2026). We expect MOPCO to reach a topline figure of EGP14,111 in 2022 (+13.9% YoY), and a bottom-line figure of EGP3,972 million for 2022 (+2% YoY). MOPCO profit growth is capped in our model by the enforcement of local quota volumes in 2022. MOPCO is trading at 2022 P/E of 5.8x and EV/EBITDA of 3.6x.  Post the full repayment of its debt in 2022, the market was speculating about MOPCO paying high dividends, given its high cash-generating ability, however, MOPCO announced that the company is in the process of engaging in the trading of all fertilizers and their derivatives, as well as establishing a Melamine production plant that will cater for local and international markets. Thus, we assume MOPCO will maintain its historical dividend payout (56%), since it will have capex spending. We have excluded this project from our valuation due to lack of disclosures on investment spending, production volumes, or margins.