Engro Corp Ltd/Pakistan

ENGRO announced 3QCY22 consolidated NPAT of PKR8.2bn (EPS: PKR13.91) as compared with EPS of PKR10.62 in SPLY, up 31%YoY. The result announcement was accompanied by a surprise interim cash dividend of PKR10.0/sh. ETR has reduced to 23% as compared to...

Engro Corporation (ENGRO) announced 2QCY21 consolidated NPAT of PKR8.72bn (EPS: PKR15.13) as compared with PKR5.74bn (EPS: PKR9.96) in SPLY, up 52% yoy and 5% qoq. The result announcement was accompanied by an interim cash dividend of PKR7.0/sh, in addition to PKR12.0/sh announced in 1Q. Despite the decline in revenue of the Fertilizer business, net revenues jumped by 10% yoy to PKR68.5bn mainly on account of higher revenues from the Chemical and other businesses. In the Fertilizer segment, EFERT posted 24% yoy growth in consolidated profits thanks to higher Urea and DAP prices. We await detailed financials for more clarity. We have a Buy stance on the scrip with a TP of PKR380/sh.

Engro Corporation (ENGRO) announced 1QCY21 consolidated NPAT of PKR8.34bn (EPS: PKR14.47) as compared with PKR3.3bn (EPS: PKR5.76) in SPLY, up 151% yoy and 23% qoq. The result announcement was accompanied by an interim cash dividend of PKR12.0/sh. Net revenues jumped significantly by 58% yoy to PKR70.9bn mainly on account of higher revenues from the Fertilizer and Chemical businesses. Among other line items (i) share of income from associates increased to PKR1.01bn, up c.3.

Engro Corporation Ltd (ENGRO) posted a NPAT of PKR25.14bn for CY20 (EPS: PKR43.57), up 52% yoy from PKR16.50bn (EPS: PKR28.69) in CY19. ENGRO also announced a cash dividend of PKR26.0/sh for CY20. The Fertilizer business achieved a milestone of highest ever Urea production of 2.06mn tons, and the market share also improved to 33% in CY20 vs 32% in CY19. The expansion of PVC/VCM debottlenecking is expected to be online by 1HCY21.

Market activity declined 6.5% mom to but remained healthy at c. Our top picks are HBL, LUCK, DGKC, ENGRO and HUBC. CCP investigates recent cement price increases: The Competition Commission of Pakistan (CCP) reportedly searched the offices of the cement sector’s association APCMA and some companies, investigating an alleged plan for a large price increase by April 2020. The deceleration was also due to a high base-effect (CPI rose 10.5% yoy in August 2019). The decision fell in line with consensus expectations where the money market and PIB rates in recent auctions had suggested no change in MPS. KSE-100 has rallied c.49% from its CY20td low with forward P/E crossing 8.

ENGRO posted a NPAT of PKR5.74bn (EPS: PKR9.97) for 2QCY20 as compared to PKR2.79bn (EPS: PKR4.86) in SPLY, up 105% yoy. This took 1HCY20 profitability to PKR9.06bn (EPS: PKR15.73), up 33% yoy. ENGRO also announced an interim cash dividend of PKR8.0/sh, taking cumulative 1HCY20 payout to PKR14.0/sh. The Polymer business' profitability was down 86% yoy amid closure of plants due to gas leakage initially followed by Covid-19 induced lockdown. PP is extensively used in Pakistan for packaging material.

Engro Corporation (ENGRO) announced 2QCY20 consolidated NPAT of PKR5.74bn (EPS: PKR9.97) as compared to PKR2.79bn (EPS: PKR4.86) in SPLY, up 105%yoy. In the Fertiliser segment, EFERT posted consolidated 2QCY20 NPAT of PKR3.9bn (EPS: PKR2.91), up 22% yoy, taking 1HCY20 NPAT to PKR4.45bn (EPS: 3.34), down 38%yoy. Among other line items (i) share of income from associates increased to PKR873mn, up 3.1x yoy, indicating a rebound in profitability from their dairy business, (ii) effective tax rate has decreased to 25% as compared to 50% in 2QCY19 due to a one-off tax reversal booked last year. However, we await the financials for more clarity. As per the ruling, EFERT has to pay PKR48.

The KSE-100 bounced back sharply in July 2020 (up 14%mom) after muted performance in June (CYTD decline narrowed to -3.6%). KSE-100 has rallied c.44% (12,030 points) from its CY20td low in March, where we think the rally can extend if (i) future economic data continues to improve, and (ii) buildup in Covid-19 cases remains slow. We prefer ENGRO, HBL, LUCK, INDU and MTL. These measures can sustainably lift the profitability for OMCs. Per-day Covid-19 case count stalled substantially: Pakistan’s daily infection count dropped considerably in July 2020 (to avg.

As per NFDC data, Urea offtake during June 2020 clocked in at c.1.16mn tons, up 81% yoy and 4.9x mom. Few players are still selling at a price of PKR1,530/bag, as per our channel checks. DAP offtake fell 17% yoy to c.176k tons in June but was up 2.9x mom due to low-base effect. DAP inventory stood at 474k tons by end-June, down 6% yoy from 504k tons in June 2019. In the near term, fertilizer demand will likely remain softer than usual due to the threat of locust attack after monsoon season and higher offtake in June, but we continue to expect total Urea sales in CY20 of 5.7mn tons, supported by the PKR37bn direct farmer subsidy on fertilizers (announced by the government in May).

The KSE-100 repeated a muted performance in June 2020 (up 1.5%mom), closing FY 20 only 1.5%yoy higher (but rebounded 18% in 4Q). Market sentiment was clouded by the alarming rise in Covid-19 cases (fear of another lockdown). Our top picks are ENGRO, HBL, LUCK, INDU and MTL. This also followed a worsening outlook for GDP growth (IMF downgraded its FY21 projection to 1.0% from 2.0% earlier). This promises to maintain a 3mth import cover and provide relief to the PKR, which has depreciated c.5% against the US$ since May 2020. The June results season will likely depict the worst corporate profitability in years due to lockdown (but is largely priced in, in our view).

The KSE-100 was flat in May 2020 (down 0.5% mom), taking CY20td decline to 17%. US$46mn average daily traded value. FIPI outflow (US$40mn in May) continued for the fourth consecutive month since the onset of Covid-19 pandemic. Pakistan Market staged a flattish performance in May despite two major positive triggers – the easing of lockdown and MPS. Major concerns remain the accelerated buildup of Covid-19 cases in Pakistan and the broadening of twin deficits, which, if not tamed, threaten to keep economic activity below par for longer, in our view. Our top picks are ENGRO, OGDC, UBL, INDU, and MTL.

The KSE-100 bounced back in April 2020, rising 17% mom, after a sharp 23% decline in March. The rally was led by (i) government decision to ease off lockdown conditions for certain industries, (ii) an emergency 200bps cut in the policy rate, bringing it to 9.0%, and (iii) a massive 62% slump yoy in global oil prices. International oil prices (Brent) recovered 11% mom while the PKR appreciated 4% against the US$. However, this is also due to higher number of testing. With several industries beginning to reopen both domestically and globally, economic activity should continue to rebound (albeit more strongly after Ramadan). Our top picks are ENGRO, HUBC, OGDC, UBL and INDU.

The KSE-100 lost nearly a quarter of its market cap, falling 23%, in March 2020 (worst month since the 2008-09 crisis). A 225bps cut in interest rates by the SBP could not appease the market sentiment. From our discussions with many corporates, most expect losses in the April-June quarter and a gradual recovery until September 2020. Oil prices halved: A notable positive for the Pakistani economy is the sharp decline in international oil prices (Brent fell to a multiyear low of US$22/bbl) amid breakdown of consensus on production cuts between Russia and OPEC. Going forward, the extent of the decline in exports and remittances will shape economic outlook, in our view.

Much reduced twin deficits and a downward inflationary path have set the stage for monetary easing. Pakistan is witnessing classic macroeconomic stabilization under an IMF program, with the current account deficit reducing by 73%yoy in 5MFY20, Fx reserves filling out quickly, a primary surplus on the fiscal side, and yield curve inversion. For 2020f, we advocate remaining Overweight on Banks while gradually increasing positions in Cements and Consumer companies. Our top picks are UBL, BAFL, OGDC, HUBC, LUCK and MUGHAL.

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. 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. SECMC and Thar power project (660MW) has successfully achieved CoD in Jul’19.

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. We have a Buy recommendation and a target price of PKR345. Fertilizer segment of ENGRO (EFERT) posted 2QCY19 NPAT of PKR3.2bn (EPS: PKR2.38), down 3% yoy. 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.

FCEPL posted 2QCY19 loss of PKR322mn (LPS: PKR0.42) vs. 2QCY18 NPAT of PKR210mn (EPS: PKR0.27). This brings FCEPL’s 1HCY19 loss to PKR239mn (LPS: PKR0.31) vs. a profit of 511mn (EPS: PKR0.67) in 1HCY18. The company did not announce any interim dividend, as was expected. Gross margins receded to 15.0% vs. 17.9% in the previous quarter. Margins may rise going forward, in our view, if the company chooses to raise prices. Interestingly, there has been a 15%yoy reduction in selling expenses, despite the revenue jump, indicating strong cost controls. We think this may have resulted from the application of minimum taxation (on 1.5% of revenue).

We expect FCEPL (formerly EFOODs) to post a 2QCY19 net loss of PKR137mn(LPS: PKR0.18), vs. 2QCY18 NPAT of PKR210mn (EPS: PKR0.27). The recovery in market share of established brands and success of recent new product launches (OLPER’s full cream milk powder, OLPER’s Pro-Cal) are expected to boost sales (up 11%yoy). This is still lower than potential, in our view. We expect inflationary costs to be passed on in the coming months. SG&A expenses are also likely to keep earnings under pressure due to costs associated with newly launched brands.

The first full Budget under the PTI government initiates the promised structural reforms, with a significant focus on widening the tax net, and large disincentives for unproductive activities such as the trading of immovable properties. This is a clear demonstration that the government is now taking the tough steps that are needed to set Pakistan’s economy on a more sustainable footing. The corporate sector sees some measures that will result in a cut to earnings estimates. With the IMF’s pre-program conditions also now seemingly out of the way, and greater clarity in place, we expect investor confidence - both local and foreign - to improve and drive better market performance in 2H19.

Engro Corporation (ENGRO) announced 1QCY19 consolidated NPAT of PKR4.0bn (EPS: PKR7.66) as compared to PKR4.2bn (EPS: PKR8.01) in SPLY, down by 4%yoy. The result announcement was accompanied with an interim cash dividend of PKR7.0/sh. For its Polymer business, EPCL’s profitability declined by 25% yoy to PKR1.1bn in 1QCY19 mainly on account (i) lower volumes of PVC/caustic sales (ii) lower GMs owing to higher gas prices, and (iii) absence of one-off insurance claim received in same quarter of last year. The board has approved an investment of PKR7.5bn in telecommunication infrastructure through Enfrashare (wholly owned subsidiary of Engro Infiniti).

In a recent development, the government has decided to allow urea import of 100k tons amid inadequate inventory levels for Kharif season. However, post the recent hike in urea prices, the negative impact of the above GIDC resolution will be diluted substantially for concessionary gas players, namely EFERT and FATIMA. Even post resumption of operations by LNG based players, from Mar’19 up until Oct’19, risk of oversupply in the market is unlikely, in our view. Capitalizing on low inventory levels of urea in the market, fertilizer manufacturers have already raised urea prices by c. The long standing GIDC issue between the government and manufacturers remains stalled.

Engro Corporation (ENGRO) announced 4QCY18 consolidated NPAT of PKR2.8bn (EPS: PKR5.3) vs PKR2.5bn (EPS: PKR4.8) in the same period a year earlier, up 11%yoy. This takes CY18 profitability to PKR12.7bn (EPS: PKR24.26), up 35% yoy. The results announcement was accompanied by bonus shares of 10%. We have a Buy recommendation and a target price of PKR379. EFOODS posted a net loss of PKR448mn (LPS: PKR0.58) in 4QCY18 vs. a loss of PKR3mn (LPS: PKR0.00) in SPLY as business clearly continues to face challenges on its costs side. Risks: (i) High recurring developmental expenditures, and (ii) delay in execution / announcement of upcoming projects.