The Bell about – ENGRO – Incremental gas supply to boost CY13 earnings – Elixir Securities Limited

Karachi, July 15, 2013 (PPI-OT): Gas supply from Mari diverted to Engro fertilizers: According to a notice issued to KSE on Friday, ECC in its last meeting has allocated 60mmscfd of gas to Engro Fertilizers.

According to Elixir Securities Limited incrementals gas supply will be provided to the plant until new 747MW Guddu power plant comes online.

Sustainability of this gas supply: Yesterday’s decision to allocate the entire gas to ENGRO (ECC in its earlier meeting of July 04, 2013 had approved diversion to the fertilizer sector in general) would likely not be acceptable to other Mari network based fertilizer manufacturers as FFC and Fatima are also facing minor gas curtailment.

CY13 earnings to increase substantially: In case Engro gets this incremental 60 mmcfd gas from Aug-13 to Oct-13, CY13 earnings of ENGRO would likely clock in at PKR18.4/share as the old plant will likely run on 80% utilization after provision of this additional gas.

Estimates raised; BUY maintained: On assumption of increased gas supply, Elixir Securities Limited has revised CY13 EPS by 50% to PKR18.4. Elixir Securities Limited also revise Elixir Securities Limited Jun-14 PT upwards by 6% to PKR208/share. At last closing price, ENGRO offers a strong upside of 20% to Elixir Securities Limited Jun-14 PT of PKR208/share. BUY!

Gas supply to Engro fertilizers from Mari to rise by 60mmcfd
According to a notice issued to KSE on Friday, Government has redirected the 60mmscfd gas allocation of Guddu power plant to Engro Fertilizers. With this incremental gas supply, ENGRO would be able to operate both plants at utilization of 80-85%.

Government has allocated this gas supply temporarily unitl new 747MW Guddu power plant comes online. While Guddu expansion was initially scheduled to come online during summer of 2013, industry sources suggest that commencement of 747 MW expansion at Guddu would not occur until latter half of FY14.

This implies that Engro would likely receive this 60 mmcfd gas from Mari for a period of three to nine months.

Sustainability of this gas supply
ECC in its meeting of July 04, 2013 had suggested diversion of this incremental gas supply available from Mari gas field network to fertilizer sector.

There were expectations that this gas supply would be shared among all three Mari network based fertilizer plants namely FFC, FATIMA and Engro fertilizers as the three plants faced a pro rata curtailment when this gas was initially diverted to Guddu in FY10. Elixir Securities Limited channels checks suggest Engro Fertilizers could only run it’s both plants if it is provided all of this 60mmscfd gas supply.

Thus, ECC would likely have decided complete allocation to Engro Fertilizers. However, the decision would likely not be acceptable to other Mari based fertilizer manufacturers and thus increase risk to sustainability of this incremental gas supply.

CY13 earnings to increase substantially
Elixir Securities Limited had initially assumed urea production of Engro fertilizers for CY13 at 1.0mn tons. However, this incremental gas supply would likely prop up utilization of old plant to 80%. Owing to risk of sustainability of this incremental gas supply, Elixir Securities Limited have conservatively assumed that this gas supply would only be provided from Aug-13 to Oct-13.

Factoring in increased gas supply (0.2mn tons), and also incorporating better than expected production figures for 1HCY13, Elixir Securities Limited have increased urea production forecast for CY13 to 1.3mn tons, 30% higher than Elixir Securities Limited base case.

Accordingly, Elixir Securities Limited has revised upwards CY13 EPS by 50% to PKR18.4. Continuation of gas supply beyond Oct-13 would augment EPS by PKR1.6 for every one month of additional gas supply.

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