1. No category

PAKISTAN
ENGRO PA
Price (at 13:41, 08 Jan 2015 GMT)
Valuation
Outperform
Rs248.63
Rs
291.60
Engro Corporation
Gaining Momentum
Event
- Sum of Parts
12-month target
Rs
291.60
Upside/Downside
%
+17.3
12-month TSR
%
+18.9
Volatility Index
Medium
GICS sector
Materials
Market cap
Rsm
130,229
Market cap
US$m
1,293
30-day avg turnover
US$m
10.1
Number shares on issue
m
523.8
Revenue
EBIT
EBIT growth
Reported profit
EPS rep
EPS rep growth
PER rep
Total DPS
Total div yield
ROA
ROE
EV/EBITDA
Net debt/equity
P/BV
2013A 2014E 2015E 2016E
bn
bn
%
bn
Rs
%
x
Rs
%
%
%
x
%
x
155.4
23.1
54.3
8.2
15.62
513.8
15.9
0.00
0.0
11.6
18.3
6.2
138.4
2.6
(ENGRO) amid the improving dynamics of its fertilizer and food businesses.
Further, curtailed losses of its subsidiary Engro Eximp and commencement of
Engro Elengy will augment CY15 earnings, in our view. Extended flows of
diverted gas from Guddu beyond December 2015, and material development
on Sindh Engro Coal Mining Corporation (SECMC) could further improve
stock attractiveness. We reiterate our Outperform rating and raise our target
price from Rs152.70 to Rs291.60.
Impact
Investment fundamentals
Year end 31 Dec
 We believe the coming months look promising for Engro Corporation
171.4
19.1
-17.2
6.5
12.49
-20.0
19.9
1.00
0.4
9.0
12.3
7.1
93.6
2.4
185.1
30.9
62.0
16.6
31.68
153.6
7.8
4.00
1.6
14.6
26.6
4.9
46.7
1.9
198.5
32.9
6.4
18.8
35.82
13.1
6.9
8.00
3.2
15.8
24.4
4.7
24.4
1.5
ENGRO PA rel Pakistan KSE 100 Share
performance, & rec history
 Improved gas scenario: The Economic Coordination Committee (ECC) has
extended Guddu power plant supply to Engro Fertilizer (EFERT) until
December 2015 to reciprocate for its commitment to install a gas booster
compressor for the 747MW Guddu Power Plant (GENCO-II). We believe this
will allow the company to operate both plants at ~75% capacity in CY15 vs
our estimate of 53%. This should lead to incremental earnings of Rs4.5/sh
after incorporating the cost of installing gas compressors (US$15.36m), in
addition to the impact of concessionary gas and deleveraging.
 EFOODS recuperating from lean patch: Engro Foods’ (EFOODS) focus on
resolution of supply chain issues is likely to rejuvenate volumes. Improving
volumes along with reduction in fuel and distribution cost (on the back of
plummeting oil prices) would likely to improve the margins in CY15. Further
strength to our case comes from registration of “Omung” as a ‘Dairy Drink’ at
Federal level that may resolve its issue with the Punjab Food Authority (PFA).
 Volte-face on Eximp business: Despite healthy trading margins in its DAP
Note: Recommendation timeline - if not a continuous line, then there was no
Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2015
(all figures in PKR unless noted)
segment on the back of timely purchases, the company incurred a Rs5.14/sh
loss during the first nine months. As per latest financials, the substantial loss
mainly comes from its rice business as a result of higher inventory of rice
paddy procured at elevated prices. However, we estimate this segment will be
back in the black in CY15, due to lower inventory levels of both rice and DAP.
Earnings and target price revision
 We cut our reported EPS by 48% for CY14, given: 1) decline in margins of
EFOODS along with the loss on sale of the North American business; and,
2) the loss at EXIMP. However, we lift our CY15 estimates by 31%, on the
back of improved gas scenario along with improving margins of food
business. Subsequently, we increase our TP to Rs291.6/sh from Rs152.7.
Analyst(s)
James Hubbard, CFA
+852 3922 1226
[email protected]
Price catalyst
 12-month price target: Rs291.60 based on a Sum of Parts methodology.
Foundation Securities
Nauman Khan
+92 21 3561-2290-94
[email protected]
Ext 338
Mohammad Awais Ashraf
+92 21 3561-2290-94
[email protected]
Ext 339
\
9 January 2015
 Catalyst: 1) Further extension in flows from Guddu, 2) recovery in Omung
sales and 3) materialization of SECMC and Engro Elengy terminal.
Action and recommendation
 We reiterate our Outperform stance, given positive earnings outlook on the
back of continued flows from Guddu and improved EFOODS margins.
Macquarie Capital Securities Limited
Please refer to page 4 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Macquarie Research
Engro Corporation
Macquarie Quant View
190/254
Global Alpha Model
Sector Rank
% of BUY recommendations
Number of Price Target downgrades
Number of Price Target upgrades
Attractive
Displays where the
company’s ranked based
on the fundamental
consensus Price Target
and Macquarie’s
Quantitative Alpha model.
The rankings are
displayed relative to the
sector and country.
Fundamentals
The quant model currently holds a reasonably negative view on Engro
Corporation. The strongest style exposure is Price Momentum, indicating this
stock has had strong medium to long term returns which often persist into the
future. The weakest style exposure is Profitability, indicating this stock is not
efficiently converting its investments to earnings as proxied by ratios such as
ROE, ROA etc.
Quant
Rank within Country
100% (6/6)
1
1
Rank within Sector
Macquarie Alpha Model ranking
Factors driving the Alpha Model
A list of comparable companies and their Macquarie Alpha model score
(higher is better).
For the comparable firms this chart shows the key underlying styles and their
contribution to the current overall Alpha score.
Lucky Cement
Lucky Cement
1.8
Fatima Fertilizer
Fatima Fertilizer
0.9
Engro Corporation
Engro Corporation
-0.8
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
-100%
-80%
Valuations
-60%
Growth
-40%
-20%
Profitability
0%
20%
Earnings
Momentum
40%
60%
Price
Momentum
80%
100%
Quality
Macquarie Earnings Sentiment Indicator
Drivers of Stock Return
The Macquarie Sentiment Indicator is an enhanced earnings revisions
signal that favours analysts who have more timely and higher conviction
revisions. Current score shown below.
Breakdown of 1 year total return (local currency) into returns from dividends, changes
in forward earnings estimates and the resulting change in earnings multiple.
Lucky Cement
Lucky Cement
1.3
Fatima Fertilizer
Fatima Fertilizer
0.4
Engro Corporation
Engro Corporation
0.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
-70%
-50%
Dividend Return
-30%
-10%
Multiple Return
10%
30%
Earnings Outlook
50%
What drove this Company in the last 5 years
How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s
returns over the last 5 years.
A more granular view of the underlying style scores that drive the alpha (higher is
better) and the percentile rank relative to the sector and country
⇐ Negatives Positives ⇒
Price to Book NTM
BPS Growth FY1
28%
Price to Book FY1
24%
Price to Sales NTM
21%
Merton Score
-15%
Profit Margin NTM
-15%
Profit Margin FY1
-17%
EBITDA Revisions 3 Month
-40%
Normalized
Score
31%
-21%
-20%
0%
20%
40%
Alpha Model Score
Valuation
Growth
Profitability
Earnings Momentum
Price Momentum
Quality
Capital & Funding
Liquidity
Risk
Technicals & Trading
0
Percentile relative
to sector(/254)
70%
1Yr Total Return
Percentile relative
to country(/5)
-0.77
-0.70
0.97
-0.86
-0.56
1.30
-0.56
0.23
-0.13
-1.52
-0.48
0
0
1
50
100 0
50
1
100
For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie
Global Quantitative/Custom Products Group ([email protected])
9 January 2015
2
Macquarie Research
Engro Corporation
Engro Corporation (ENGRO PA, Outperform, Target Price: Rs291.60)
Interim Results
1H/14A
2H/14E
1H/15E
2H/15E
Profit & Loss
2013A
2014E
2015E
2016E
Revenue
Gross Profit
Cost of Goods Sold
EBITDA
Depreciation
Amortisation of Goodwill
Other Amortisation
EBIT
Net Interest Income
Associates
Exceptionals
Forex Gains / Losses
Other Pre-Tax Income
Pre-Tax Profit
Tax Expense
Net Profit
Minority Interests
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
77,541
16,770
60,771
12,176
3,496
0
0
8,680
-3,690
0
0
0
362
5,351
-2,188
3,163
-480
93,864
18,356
75,508
15,662
5,243
0
0
10,419
-3,063
0
0
0
604
7,960
-2,779
5,181
-1,321
74,060
20,181
53,879
15,955
3,579
0
0
12,376
-1,518
0
0
0
469
11,328
-3,430
7,898
-1,402
111,090
30,272
80,818
23,932
5,368
0
0
18,564
-2,277
0
0
0
525
16,813
-5,145
11,668
-1,569
Revenue
Gross Profit
Cost of Goods Sold
EBITDA
Depreciation
Amortisation of Goodwill
Other Amortisation
EBIT
Net Interest Income
Associates
Exceptionals
Forex Gains / Losses
Other Pre-Tax Income
Pre-Tax Profit
Tax Expense
Net Profit
Minority Interests
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
155,360
40,597
114,763
31,633
8,565
0
0
23,068
-10,415
0
0
0
610
13,263
-4,573
8,690
-507
171,405
35,125
136,280
27,838
8,739
0
0
19,099
-6,753
0
0
0
966
13,312
-4,967
8,344
-1,800
185,150
50,453
134,697
39,887
8,947
0
0
30,940
-3,794
0
0
0
995
28,140
-8,575
19,566
-2,971
198,503
51,555
146,948
42,077
9,160
0
0
32,917
-2,714
0
0
0
1,025
31,228
-9,114
22,113
-3,350
Reported Earnings
Adjusted Earnings
m
m
2,684
2,684
3,860
3,860
6,496
6,496
10,099
10,099
Reported Earnings
Adjusted Earnings
m
m
8,183
8,183
6,544
6,544
16,595
16,595
18,763
18,763
EPS (rep)
EPS (adj)
EPS Growth yoy (adj)
%
5.12
5.12
-22.0
7.37
7.37
-18.6
12.40
12.40
142.1
19.28
19.28
161.6
EPS (rep)
EPS (adj)
EPS Growth (adj)
PE (rep)
PE (adj)
%
x
x
15.62
15.62
513.8
15.9
15.9
12.49
12.49
-20.0
19.9
19.9
31.68
31.68
153.6
7.8
7.8
35.82
35.82
13.1
6.9
6.9
EBITDA Margin
EBIT Margin
Earnings Split
Revenue Growth
EBIT Growth
%
%
%
%
%
15.7
11.2
41.0
16.0
-17.5
16.7
11.1
59.0
6.1
-16.9
21.5
16.7
39.1
-4.5
42.6
21.5
16.7
60.9
18.4
78.2
Total DPS
Total Div Yield
Basic Shares Outstanding
Diluted Shares Outstanding
%
m
m
0.00
0.0
524
524
1.00
0.4
524
524
4.00
1.6
524
524
8.00
3.2
524
524
2013A
2014E
2015E
2016E
2013A
2014E
2015E
2016E
31,633
-4,573
9,802
0
-9,913
26,950
0
-8,413
0
-15,610
-24,023
0
0
-7,066
6,375
-691
27,838
-4,967
6,777
0
-5,787
23,860
0
-10,134
0
-758
-10,893
0
0
-11,113
-210
-11,323
39,887
-8,575
2,455
0
-2,800
30,967
0
-1,248
0
-1,440
-2,688
-524
0
-15,184
-15,373
-31,080
42,077
-9,114
405
0
-1,689
31,679
0
-2,629
0
-7,546
-10,175
-2,095
0
-15,594
-1,889
-19,578
Profit and Loss Ratios
Revenue Growth
EBITDA Growth
EBIT Growth
Gross Profit Margin
EBITDA Margin
EBIT Margin
Net Profit Margin
Payout Ratio
EV/EBITDA
EV/EBIT
%
%
%
%
%
%
%
%
x
x
24.1
36.3
54.3
26.1
20.4
14.8
5.3
0.0
6.2
8.6
10.3
-12.0
-17.2
20.5
16.2
11.1
3.8
8.0
7.1
10.3
8.0
43.3
62.0
27.2
21.5
16.7
9.0
12.6
4.9
6.4
7.2
5.5
6.4
26.0
21.2
16.6
9.5
22.3
4.7
6.0
Balance Sheet Ratios
ROE
ROA
ROIC
Net Debt/Equity
Interest Cover
Price/Book
Book Value per Share
%
%
%
%
x
x
18.3
11.6
12.8
138.4
2.2
2.6
97.1
12.3
9.0
8.9
93.6
2.8
2.4
105.2
26.6
14.6
17.3
46.7
8.2
1.9
132.7
24.4
15.8
19.4
24.4
12.1
1.5
160.5
Cashflow Analysis
EBITDA
Tax Paid
Chgs in Working Cap
Net Interest Paid
Other
Operating Cashflow
Acquisitions
Capex
Asset Sales
Other
Investing Cashflow
Dividend (Ordinary)
Equity Raised
Debt Movements
Other
Financing Cashflow
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
Net Chg in Cash/Debt
m
2,236
1,645
-2,801
1,926
Free Cashflow
m
18,536
13,726
29,720
29,050
2013A
2014E
2015E
2016E
6,899
3,033
27,738
21,674
132,686
808
14,069
206,907
40,129
6,380
78,321
0
25,874
150,704
32,466
5,319
18,418
56,203
206,907
8,545
5,429
31,526
21,740
134,172
316
16,172
217,899
53,205
7,590
61,166
0
31,618
153,579
38,486
9,222
16,613
64,321
217,899
5,745
3,615
32,934
23,353
126,659
316
12,411
205,033
53,830
8,000
35,894
0
25,598
123,322
52,986
12,193
16,532
81,711
205,033
7,671
3,876
35,309
31,057
120,250
316
12,692
211,170
57,712
8,000
23,935
0
21,889
111,536
67,559
15,543
16,532
99,634
211,170
Balance Sheet
Cash
Receivables
Inventories
Investments
Fixed Assets
Intangibles
Other Assets
Total Assets
Payables
Short Term Debt
Long Term Debt
Provisions
Other Liabilities
Total Liabilities
Shareholders' Funds
Minority Interests
Other
Total S/H Equity
Total Liab & S/H Funds
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
All figures in PKR unless noted.
Source: Company data, Macquarie Research, January 2015
9 January 2015
3
Macquarie Research
Engro Corporation
Important disclosures:
Recommendation definitions
Volatility index definition*
Financial definitions
Macquarie - Australia/New Zealand
Outperform – return >3% in excess of benchmark return
Neutral – return within 3% of benchmark return
Underperform – return >3% below benchmark return
This is calculated from the volatility of historical
price movements.
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging,
IFRS impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests
Benchmark return is determined by long term nominal
GDP growth plus 12 month forward market dividend
yield
Macquarie – Asia/Europe
Outperform – expected return >+10%
Neutral – expected return from -10% to +10%
Underperform – expected return <-10%
Macquarie First South - South Africa
Outperform – expected return >+10%
Neutral – expected return from -10% to +10%
Underperform – expected return <-10%
Macquarie - Canada
Outperform – return >5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return >5% below benchmark return
Macquarie - USA
Outperform (Buy) – return >5% in excess of Russell
3000 index return
Neutral (Hold) – return within 5% of Russell 3000 index
return
Underperform (Sell)– return >5% below Russell 3000
index return
Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year
– investors should be aware this stock is highly
speculative.
High – stock should be expected to move up or
down at least 40–60% in a year – investors should
be aware this stock could be speculative.
Medium – stock should be expected to move up
or down at least 30–40% in a year.
Low–medium – stock should be expected to
move up or down at least 25–30% in a year.
Low – stock should be expected to move up or
down at least 15–25% in a year.
* Applicable to Asia/Australian/NZ/Canada stocks
only
EPS = adjusted net profit / efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average
number of shares
All Reported numbers for Australian/NZ listed stocks
are modelled under IFRS (International Financial
Reporting Standards).
Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Recommendation proportions – For quarter ending 31 December 2014
Outperform
Neutral
Underperform
AU/NZ
51.80%
31.80%
16.39%
Asia
58.06%
27.37%
14.57%
RSA
45.07%
30.99%
23.94%
USA
44.42%
50.10%
5.48%
CA
60.54%
35.37%
4.08%
EUR
46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients)
33.51% (for US coverage by MCUSA, 3.08% of stocks followed are investment banking clients)
19.68% (for US coverage by MCUSA, 0.44% of stocks followed are investment banking clients)
ENGRO PA vs Pakistan KSE 100 Share, & rec history
(all figures in PKR currency unless noted)
Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2015
12-month target price methodology
ENGRO PA: Rs291.60 based on a Sum of Parts methodology
Company-specific disclosures:
Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.
Date
13-Aug-2012
Stock Code (BBG code)
ENGRO PA
Recommendation
Outperform
Target Price
Rs152.70
Target price risk disclosures:
ENGRO PA: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global
economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates,
foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to
manage certain of these exposures.
Analyst certification:
The views expressed in this research accurately reflect the personal views of the Macquarie analyst(s) and Foundation Securities analyst(s) about the
subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific
recommendations or views expressed by the analyst(s) in this research. The Macquarie analyst principally responsible for the preparation of this
research receives compensation based on overall revenues of Macquarie Group Ltd ABN 94 122 169 279 (AFSLNo. 318062) (MGL) and its related
entities (the Macquarie Group) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
General disclaimers:
Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America
Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd and its Taiwan branch; Macquarie Capital Securities (Singapore) Pte Ltd;
Macquarie Securities (NZ) Ltd; Macquarie First South Securities (Pty) Limited; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities
(Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the
purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank
Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above
mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital
Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie
9 January 2015
4
Macquarie Research
Engro Corporation
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