Document 327611

Morning Shout
Pakistan Daily Notes
EFERT: Increased confidence on gas supply; upgrade to Buy!
We upgrade our rating on EFERT to Buy with new PO of PRs66/sh implying 20%
upside. At current levels, the stock is trading at a 2015E P/E of 7.7x and is
currently our top pick in the fertilizer sector.
Our liking for EFERT has increased post unexpected continuation of gas supply in
2H14 which we believe has set the stage for meaningful earnings upside and
aggressive deleveraging in 2014. Furthermore, recent govt decision of diversion
of priority gas allocation of gas to the fertilizer sector can work in EFERT's favor.
EFERT is expected to post net earnings of PRs5.1bn (EPS:3.89/sh) during 9M14.
While the currency devaluation is expected to add the sour flavor during 3Q14 in
the shape of forex losses, any tax losses may result in an earnings surprise.
The stock has underperformed the KSE-100 index by 1.6%/16% in the past 3/6M,
making it much attractive at CY15E P/E of 7.7x.
PO lifted to PRs66/sh; Upgrade rating to Buy
We have raised our PO for Engro Fertilizers (EFERT) by 12% to PRs66/sh and have upgraded the
stock to Buy from Neutral. Unexpected continuation of gas supply into 2H14 resulting in
earnings upside and aggressive deleveraging, coupled with relative underperformance of stock
in 3/6mth vs KSE-100 index have strengthened a case for rating upgrade, in our view. At
CY14/15E P/E of 10.3x/7.7x, EFERT trades at 10% discount to its peers. Moreover, the govt’s
move to divert gas towards the fertilizer sector will likely increase confidence in the longevity of
Guddu gas to EFERT and lead to narrowing of valuation discount.
10 October 2014
Ameet Daulat
[email protected]
KASB Securities Limited
+92 21 111 222 000
Current Price
PRs55.04
Price Objective PRs66
KATS
Reuters
Bloomberg
EFERT
ENGR.KA
EFERT PA
Shares Outstanding
1318.3mn
Market Cap
PRs72562mn (USD705.51mn)
EFERT Valuation Snapshot
...however absence of concessionary prices leads to earnings cut
PRsmn
2013A
2014E
2015E
We have also trimmed our earnings projections for 2014/15E by -2%/-21% on account of delay
in the billing of concessionary gas rate to 2H15. Our previous forecast incorporated
US$0.7/mmbtu gas prices for feedstock portion from Mari field in 4Q14 which we believe has
become irrelevant given likely continuation of gas supply from Guddu, enabling the company to
successfully run both the plants during 2H14.
Revenue
%∆
PAT
%∆
EPS (PRs)
P/E (x)
50,129
14%
5,497
NM
4.17
13.19
57,619
15%
7,021
28%
5.33
10.33
48,379
-16%
9,476
35%
7.19
7.65
0.00
0%
2.89
22%
5.83
1.00
2%
2.26
22%
5.30
2.00
4%
1.80
24%
4.70
Optimism from the government reigniting faith in sustained gas supply
Not long ago in May-14, the government diverted the gas from the fertilizer sector to the power
sector which has played its part in narrowing the demand-supply gap to 242k tons, the lowest
during 2014. Consequently, the latest news flow suggests that in order to address the demandsupply gap and reducing the subsidy needed for imported fertilizer, the government aims to
promote the fertilizer sector up the priority list over the power sector. This move has reignited
faith in the profitability levels of the fertilizer sector which seems set to end the year on a high
note.
Aggressive deleveraging and enhanced gas supply from Guddu to boost earnings
EFERT’s earnings are expected to continue their prolific run where we expect the company to
post PAT of PRs1.8bn (EPS: PRs1.33) in 3Q14. As a result, EFERT is expected to clock in hefty
growth (59% YoY) in 9M14 to post PAT of PRs5.1bn (EPS: PRs3.89). While the key trigger for this
growth seems to be the gas diverted from Guddu power plant, the aggressive deleveraging
which is expected to result in a 33% YoY dip in the financial charges also contributes largely for
this robust growth in 9M14. From the 2013 level of 55%, given the handsome amount of cash
the company holds (excluding any GIDC payment), we expect the D/A ratio of EFERT to plunge
down to 39%. Consequently, we expect the company to abide by the IFC covenants of dividend
payment much earlier than expected. Moreover, on the back of strong operations we believe
that EFERT will be successful in maintaining this healthy cash position, going forward, enabling
it to retire its debt by 2018.
Refer to important disclosures on page 3
DPS (PkR)
Yield (%)
P/BV (x)
ROE
EV/EBITDA
Source: KASB Research
Earnings sensitivity
2015E
2016E
Base case
7.19
10.45
Worst case
5.03
5.92
PRs
EPS
PO
Base case
66.00
Worst case
48.00
Source: KASB Research
Page 1
morning shout
PRs mn
9M14E
9M13
YoY
3Q14E
3Q13
YoY
Sales
Gross Profit
43,589
15,287
34,422
18,727
27%
-18%
15,932
5,414
13,903
7,655
15%
-29%
EBITDA
EBT
12,248
7,558
15,679
4,799
-22%
57%
4,277
2,655
6,513
2,747
-34%
-3%
5,127
3.89
3,234
2.45
59%
59%
1,752
1.33
1,808
1.37
-3%
-3%
PAT
EPS (PRs)
KSE-100 Intra-day Movement
30,125
High 30,122
30,097
30,069
30,041
30,013
GIDC saga: far from over
The future of GIDC collection continues to remain uncertain as series of court cases have
opened many battle fields for the government. The government attempted to bypass Peshawar
High Court’s verdict against GIDC through a Presidential Ordinance. However the Lahore High
Court and the Sindh High Court have given unfavorable verdicts, implying that the government
might take some time to disentangle itself from legal challenges. From EFERT’s perspective, the
decision on GIDC is unlikely to have major brunt on our investment thesis though market had
earlier become jittery on potential levy of GIDC on EFERT’s feedstock gas supply. We opine the
issue was given undue importance as EFERT’s peer, Fatima Fertilizer which has similar pricing
arrangement for feedstock has obtained a stay order from court. This has raised possibility of
EFERT receiving a similar favorable verdict from the courts.
No major downside in worst-case scenario for EFERT
In our base case scenario, we have assumed the concessionary gas rate to clock in from 2H15
onwards, however the absence of concessionary gas rate in the long run (worst case scenario)
will make it a different ball game altogether dwindling the profitability levels of EFERT. Our
preliminary sensitivity analysis suggests that in such a scenario, 2015 earnings are likely to be
slashed by 30% to PRs6.6bn (EPS: PRs5.03) and PO down to PRs48/sh or 13% below current
stock price.
Foreign reserves up by US$190mn
(BR)
Pakistan’s total liquid foreign reserves rose by US$190mn to US$13.4bn as on 3 October,
compared to US$13.2bn a week earlier. The increase can primarily be attributed to inflow of
Coalition Support Fund (CSF)..
Technical View
Ahmed Hanif
[email protected]
KSE-100: Resistance holds; back towards the 29,300-29,500 area
The index yet again broke the 30,000 level and gave a closing below that, suggesting that it
could retest the 29,300-29,500 area.
The index has failed to break the 30,300 level multiple times and has formed a strong resistance
at 30,150-30,200.
29,985
Low 29,963
29,957
9:30 AM 10:53
AM
12:16 1:39 PM 3:01 PM
PM
Source: KSE
Index Data & Volume Leaders
KSE30
KSE100
KSE All
Share
MARI
PPL
PSO
ICI
GLAXO
Close
20,296.32
29,978.94
% Chg
-0.7%
-0.4%
Vol.
US$ mn
31.20
44.46
21,930.92
493.36
223.26
353.40
541.27
203.15
-0.7%
2.2%
-1.2%
-1.6%
2.8%
0.1%
56.90
6.95
5.32
2.70
2.44
2.39
Source: KSE
KSE-100: Top Gainers & Losers
JDWS
HUMNL
ARM
GRAYS
SHFA
TRG
HBL
OGDC
Only a closing above 30,300 could guide the index further towards 31,500-32,000 area.
PCAL
It is recommended to liquidate trading positions on strength and wait for the index to close
above 30,300 to accumulate positions.
PAKT
-6%
-2%
2%
6%
Source: KSE
Page 2
morning shout
World Markets and Commodity Prices
International Equity Markets
Asian Markets (Closing Rates)
Price
All Ordinaries
Shanghai Composite
Hang Seng
BSE 30
Jakarta Composite
KLSE Composite
Nikkei 225
NZSE 50
Straits Times
Seoul Composite
Taiwan Weighted
KSE-100 Index
Abs. Chg.
5,293.30
2,375.28
23,534.53
26,637.28
4,993.88
1,829.73
15,478.93
5,266.04
3,259.25
1,965.25
8,966.44
29,978.94
51.7
48.9
271.2
390.5
35.4
5.4
-117.0
20.1
32.5
0.0
11.3
-124.3
% Chg.
1.0
2.1
1.2
1.5
0.7
0.3
-0.8
0.4
1.0
0.0
0.1
-0.4
European Markets (Last Trading Session’s Rates)
Price
Abs. Chg.
ATX
BEL-20
CAC 40
DAX
AEX General
Swiss Market
FTSE 100
% Chg.
2,114.58
3,092.71
4,141.45
9,005.02
402.66
8,482.90
6,431.90
-8.6
-7.3
-26.7
9.7
-0.8
-34.4
-50.3
-0.4
-0.2
-0.6
0.1
-0.2
-0.4
-0.8
16,659.25
4,378.34
4,041.12
1,928.21
-335.0
-90.3
0.0
-40.7
-2.0
-2.0
0.0
-2.1
American Markets
Dow Jones Ind. Average
NASDAQ Composite
NASDAQ -100
S&P 500 Index, RTH
Source: Bloomberg
Foreign Portfolio Investment in Equities
Country
Day (US$mn)
Pakistan
India
Indonesia
Japan
Philippines
South Korea
Sri Lanka
Taiwan
Thailand
Vietnam
Abu Dhabi
Qatar
(2.9)
(193.5)
(19.8)
N.A
(11.2)
(136.3)
(0.1)
1.2
45.5
(4.4)
(6.4)
(8.6)
WTD (US$mn)
9.4
(200.2)
(38.0)
1,699.2
(155.3)
(641.9)
(0.2)
(256.2)
(31.7)
(8.8)
(13.1)
31.4
MTD (US$mn)
7.2
(105.2)
(263.7)
1,699.2
(198.5)
(1,194.3)
20.8
(559.6)
(40.6)
(17.8)
(24.3)
86.8
YTD (US$mn)
12M (US$mn)
431.1
13,708.4
3,963.7
(5,524.4)
1,124.5
6,903.1
71.3
10,617.5
(128.4)
205.0
1,063.3
2,406.0
495.5
19,807.7
3,085.9
45,488.7
726.1
7,890.7
86.2
13,163.2
(2,761.4)
308.9
1,316.8
2,664.3
Date
09-10
08-10
09-10
26-09
09-10
09-10
09-10
09-10
09-10
09-10
09-10
02-10
Source: Bloomberg, NCCPL
Forex and Money Market snapshot
6-Month KIBOR (Offer)
12-M T-Bill (Average)
10- year PIB (Average)
PkR/ US$
Current
Previous
Chg.
10.19
10.08
13.40
102.85
10.19
10.08
13.38
102.54
0.00
0.00
0.02
0.31
Abs. Chg.
% Chg.
-1.5
-1.8
3.2
-1.0
0.3
-0.4
Source: KASB Money Market
Commodity Prices
Price
WTI (Crude Oil)
Gold
CRB Index
85.77
1,224.31
276.41
Source: Bloomberg
KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi
This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of
any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no
representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent
permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the
information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility
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situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for
any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB,
as a full-service firm, has or may have business relationships, including investment-banking relationships, with the companies in this report.
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