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Foundation Research
Equities

10 March 2014
Engro Ferti l i zer Ltd Outperform
Current Price Rs 57.1
Dec 14 target Rs 70.0
Upside/downside % 22.5
Valuation Rs 70.0
- DCF based
Fertilizer sector
Market cap Rs bn 74.1
30-day avg turnover US$m 3.5
Market cap US$m 716
Number shares on issue m 1,298
Investment fundamental s
Year end 31Dec 2013A 2014E 2015E 2016E
Total revenue m 50,129 50,117 65,892 67,877
EBIT m 17,054 21,506 25,289 25,509
EBIT Growth % 153 26 17.6 0.9
Recurring profit m 5,498 10,627 14,237 15,187
Reported profit m 5,498 10,627 14,237 15,187
EPS rep Rs 4.2 8.2 11.0 11.7
EPS rep growth % n/a 93.30 33.98 6.67
PE rep x 13.5 7.0 5.2 4.9
Total DPS Rs 0.0 0.0 2.0 4.0
Total div yield % - - 3.50 7.00
ROA % 5.3 10.0 13.2 13.3
ROE % - 26.9 35.0 33.2
Current Ratio x 1.3 1.3 1.6 2.1
Net debt/equity x 1.45 0.89 0.30 -0.01
Price/book x 2.1 1.5 1.2 1.0
Scenari os on gas si tuati on
14-EPS 15-EPS 16-EPS TP
PKR PKR PKR PKR/sh
Base Case 8.2 11.0 11.7 70.0
Ex. Concession 5.5 7.6 8.1 46.5
Ex Con. & KPD 5.5 4.5 4.9 28.3
Source: Foundation Research, March 2014
Anal yst
Mahad Farrukh mahad.farrukh@fs.com.pk
92 215612290- 94 Ext 339






Engro Fertilizer Ltd


Heavy cash balance to deliver early
de-leveraging Re-iterate O/P
Event
We lift our earnings estimate for Engro Fertilizer Ltd (Efert) by 73-76% for CY14-16
and upgrade our TP to PKR70.0 (up 54%). On our revised estimates, we believe
Eferts valuation still has room to grow despite 103% run-up since listing in J an14. We
reiterate Outperform rating (22.5% upside).
Eferts CY13 detailed accounts show stronger than expected cash balance of
PKR22/15bn on gross/adjusted basis. With stronger than expected year end surplus
cash balance coupled with stable production outlook, Efert should turn into dividend
paying capacity by CY15, and a virtually debt free balance sheet by CY16. We
estimate EBITDA of PKR 26.5/19.8/21.1bn under our base-case scenario/KPD w/o
US$0.7/mmbtu concessionary prices with KPD/worst-case scenario of no
US$0.7/mmbtu concessionary gas prices w/o KPD, respectively.
Impact
Del everagi ng and excess cash to i mprove earni ngs: Engros high gearing
has remained a constant point of concern for investors as it implies a high degree
of financial risk. With the production jump in CY13 (60%), financial position has
also exhibited an impressive improvement. Details on recently released CY13
report exhibits explain this turnaround where our key +ve surprise is presence of
stronger than expected cash balance of PKR15bn (adjusted). We have adjusted
gross cash balance of PKR22bn with the year-end stock of payable GIDC and
excessive advance payment.
Two obvious implications of improved liquidity position are; (1) Eferts ability to
pre-pay a portion of its debt. Eferts net debt/asset ratio has dropped to 33% by
end of CY13 from 61% in CY12, and (2) significant drop in financial charges in
medium-term incase of prepayment of debt.
Debt free bal ance sheet by CY16: We believe Efert will benefit from
concessionary gas prices and start of gas supply from KPD over the next two
years. This will significantly enhance Eferts capacity to churn out sizeable
EBITDA of PKR30bn p.a. Under our base-case scenario, we see rapid
deleveraging of Efert balance sheet and expect complete debt-free B/S by CY16.
We expect debt repayment in CY14 to be PKR15bn approximately which could
further decrease finance cost by PKR1.6bn in CY14.
Case for addi ti onal gas suppl y remai ns strong: The case for additional gas
supply to fertilizer plant is well founded, in our opinion, and hence we expect the
current govt to accord approval to long-term gas supply plan envisaged and
approved by the previous govt. Merits of local urea production versus import of
urea are driven by its positive implications on (1) external and fiscal account and
(2) maintaining stability in urea supply. However, we opine fertilizer companies
including Efert will have to pay higher gas prices than earlier agreed. We have
incorporated US$5.5/mmbtu gas prices for KPD in our base-case. Eferts share of
gas supply was 79mmcfd meant for its new plant Enven.
J ust to recall, Economic Coordination Committee (ECC) had approved
202mmcfd of gas supply to four fertilizer plants in Dec-12. Efert has already
started receiving 32mmcfd of gas supply from 5 fields with an average gas price
PAKISTAN
Engro Fertilizer Ltd March 10, 2014

2 Foundation Securities (Pvt) Limited

of US$6.53/mmbtu. Gas supply from KPD field is subject to fresh approval from the government.
Concessi onary gas pri ces-modal i ti es del ayi ng i mpl ementati on: Progress on recent relief on gas prices for new
plant is slow due to delay in finalization of legal and procedurals modalities. We expect the arrangements to be
finalized by end Mar14 and have accordingly incorporated the impact of concessionary gas prices from 2QCY14.
Under the arrangement, prices for current feedstock gas supply from Mari field have been reduced to US$0.7/mmbtu
in order to honor earlier governments commitment of providing concessionary gas prices to new urea plant, Enven,
as per the Fertilizer Policy 2001.
Producti on outl ook-not a bi g drop i n CY14: We are not expecting a big drop in production in CY14 in case of
withdrawal of 60mmcfd gas supply from Mar14 and 20-25 days expected maintenance shut-down of new plant (likely
in March). Gas supply of 60mmcfd from Mari Additional was provided to Efert on temporary basis in J uly13 for about
6-months.Post withdrawal of Mari Additional gas, Efert will likely be left with 138 mmcfd of gas which would be more
than enough to operate its new plant at higher load-factor. We expect a scenario where Efert will likely make effort to
establish new plants capacity to run at above 100% load factor. We estimate CY14 production of 1.47mn tons, down
5.67% YoY and expect volumes to recover to 1.91mn tons from CY15 onwards.
Earnings revision
In light of aforementioned developments and expectations, we have revised our estimates. We expect CY14 and
CY15 earnings to clock in at PKR8.19/sh and PKR10.79/sh, respectively. Our base case incorporates gas inflow from
KPD in CY15 and concessionary gas rates from 2QCY14,
We have considered a few other potential scenarios as well. Keeping inflow from KPD intact and excluding
concessionary gas rates, earnings estimates for CY14 and CY15 will decrease to PKR5.5/sh and PKR7.6/sh and TP
will fall to PKR46.5/sh. In our worst-case scenario where gas flow from KPD is also excluded along with the exclusion
of concessionary gas prices, earnings estimate for CY14 will remain intact at PKR5.5/sh as KPD is not expected until
1QCY15. In this case, earnings for CY15 are expected to decrease to PKR4.45/sh and our TP will fall to PKR28.3/sh.
Action and recommendation
On our revised estimates, we believe Eferts valuation still has room to grow despite 103% run-up since listing in J an-14.
We reiterate Outperform rating (22.5% upside). Declining leverage, stable future production outlook and expected maiden
payout from CY15 (a year earlier than envisaged before) will go a long way in delivering further stock price
outperformance, in our view. The stock trades at CY14 P/E of 7x and P/B of 1.5x translating into 9.3% and 72% discount to
its close peers, respectively.

Engro Fertilizer Ltd March 10, 2014

3 Foundation Securities (Pvt) Limited

PKRmn CY12A CY13A CY14E CY15E CY16E
Balance Sheet
Non Current Assets

83,123

79,563

77,006

75,228

71,704
Current Assets

14,385

30,366

25,997

36,816

43,787
Total Assets

97,508

109,929

103,004

112,044

115,492
Non Current Liabilities

55,459

62,186

47,476

39,544

31,613
Debt

48,482

55,896

41,186

33,254

25,324
Current Liabilities

26,250

22,673

19,811

22,546

21,333
Equity

15,798

25,069

35,717

49,954

62,546
Total Liabilities and Equity

97,508

109,929

103,004

112,044

115,492
Cash Fl ow St atement
Net profit

(2,934)

5,498

10,627

14,237

15,187
Change in NWC

3,199

10,846

(8,669)

518

(113)
Other

4,893

4,871

5,009

4,975

4,950
Operating cashflows

5,158

21,214

6,967

19,730

20,025
Capital expenditure

(1,308)

(2,452)

(3,196)

(1,427)

(1,358)
Other

(169)

1,142

744

(1,769)

(69)
Investment cashflows

(1,477)

(1,311)

(2,452)

(3,196)

(1,427)
Borrowings

(7,917)

7,415

(14,710)

(7,932)

(7,930)
Other

4,826

(9,886)

5,570

(118)

(3,990)
Financing cashflows

(3,091)

(2,471)

(9,140)

(8,050)

(11,921)
Change in Cashflows

590

17,432

(4,625)

8,483

6,677
Opening Balance

4,495

5,085

22,516

17,891

26,374
Ending Balance

5,085

22,516

17,891

26,374

33,052
Source: Company Accounts, Foundation Research, March 2014



Engro Fertilizer Ltd March 10, 2014

4 Foundation Securities (Pvt) Limited

About the company
Engro fertilizer Ltd (Efert) is a public limited company incorporated on J une 29
th
2009 as a wholly owned subsidiary of
Engro Corporation Ltd. The principal activity of the company is manufacturing, purchasing, and marketing of fertilizers.
It is located in Daharki, District Ghotki. The site hosts two plants, Base and Enven namely. Base plant has an installed
capacity of 975k tons per annum, while Enven has a production capacity of 1267k tons per annum.