AKD Quotidian about — ENGRO Corp., time for bottom fishing

Karachi, June 28, 2013 (PPI-OT): ENGRO’s share price has fallen sharply, down 17% Jun’13TD.

According to AKD Securities besides the bearish sentiment at the KSE, questions on the urea pricing power given the steep fall in international urea prices as well as expectation of a hike in feed stock gas prices have contributed to the negativity in the scrip, overcoming the positives from the recent cut in discount rate, 1% reduction in corporate tax rate and increased gas supply from Man SML.

ENGRO is trading at CYI3F PIE and EVIEBITDA multiples of 6.9x and 4.5x respectively and offers attractive upside to 70% to AKD Securities TP of PkR2O8/sh. Buy!

Int’l urea has not always traded at a premium: Based on historic data, international urea prices have not always traded at a premium to domestic urea. In this regard, domestic urea traded at a premium to int’l prices in the early 2000′s, however since CYO2, domestic urea has traded at an average discount of 40% to int’l urea owing to the soft commodity price boom.

Thinking worst case: Currently, the difference between feedstock and fuel stock gas, including GIDC is PkR21S/mmbtu. In case the GoP decides to equate the prices of feed and fuel stock, AKD Securities estimates a per bag urea cost increase of PkR245.

In case the manufacturers decide to fully pass on the impact of higher gas price, will increase the net price of urea to PkR1 710/bag of US$342/ton, which would be a slight premium to the current int’l FoB price of US$320/ton. Even in the worst case scenario, ENGRO Corp. will still be trading at attractive PIE ratios of 79x and 6.9x for CY13F and CY14F respectively.

Recommendation: ENGRO has been allocated additional 22mmcfd from Man SML for a year, where ENGRO has been drawing lUmmcfd additional gas from Man in 20CY12, and should be able to draw the entire allocation once its de-bottlenecking exercise is completed by the end of this year.

The additional gas supply should increase plant utilization by -1 0%-i 5%. Recall, a 1% increase in ENVEN utilization increases ENGROs annualized EPS by -PkRO.25. In additional to the incremental gas supply, other positives for ENGRO include the 50bps reduction in discount rate and 1% reduction in corporate tax rate, which should augment earnings going forward.

ENGRO is trading at CY1 3F PIE and EV/EBITDA multiples of 6Qx and 45x respectively and offers attractive upside of 70% to AKD Securities TP of PkR2O8fshare. Buy!

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