Following a successful book-building exercise aimed at attracting institutional investors and high-net worth individuals, the initial public offering (IPO) of Engro Fertilizers is about to enter its final phase where general public will subscribe to the stock at the price of Rs28.25 a share.
“The IPO of Engro Fertilizers is the best investment opportunity ever,” AKD Group Chairman Aqeel Karim Dhedhi said while speaking to The Express Tribune recently.
Along with Next Capital, AKD Securities is the book-runner for the issue. The general public portion of the IPO will consist of 25%, or 18.75 million shares, of the total issue size of 75 million ordinary shares.
“Within the first 10 days of its trading, the share price of Engro Fertilizers is expected to soar to Rs33,” according to AKD Securities CEO Muhammad Farid Alam. “Eventually, the share performance depends on the availability of gas as well as the rate at which the company gets it,” he added.
With the establishment of a 1.3-million-ton, state-of-the-art fertiliser complex in 2011, the company’s annual urea production capacity stands at 2.3 million tons, which is equal to one-third of the country’s total urea production capacity.
Engro Fertilizers has been in trouble due to unavailability of natural gas, which resulted in a net loss of Rs2.9 billion at the end of 2012. This is despite the government’s pledge to provide the company’s Deharki plant with gas at a price of $0.75 per million British thermal units (mmbtu).
Elixir Securities CEO Junaid Iqbal says his brokerage house anticipates the share price will increase to Rs54 per share in the best-case scenario in which both plants of the company receive promised gas supplies. In the worst-case scenario, wherein one plant remains shut, the stock price may drop to as low as Rs24 per share.
“Although one can’t be sure about it, it seems that the present government will honour its commitment,” Iqbal remarked about the possibility of the company getting natural gas at the subsidised rate.
According to Global Securities research analyst Imran Ahmed Patel, investment in Engro Fertilizers will offer a return better than Engro Corp in the short term at least.
“A lower free float, coupled with a huge interest in the IPO, is likely to drive the share price up in the short term, presenting an opportunity for some quick gains to the investors,” Patel said.
But given the fast-depleting gas reserves in Pakistan, does it even make sense to invest in a fertiliser company? After all, industry experts believe that domestic natural gas production, after peaking in 2014, will start declining and is expected to be less than 2,400 mmcfd in 2021.
Speaking to The Express Tribune, Engro Corp former president Asad Umar said although he is out of touch with the current state of affairs at the company, he believes the new plant will generate impressive profits even if it uses imported gas instead of relying on local gas supplies.
Umar has said in the past that the company is willing to import LNG in case the government fails to provide natural gas at the promised subsidised rate. In that case, Umar said, the company must ensure that it is allowed to either export its product to Indian Punjab or sell the same to domestic farmers at a price that is globally competitive.
According to KASB Securities research analyst Shagufta Irshad Khurram, Engro Fertilizers is her brokerage house’s ‘top pick’ in the fertiliser industry because it is the only company with an ‘embedded growth angle’.
“We expect Engro Fertilizers to report three-year earnings per share with cumulative annualised growth rate of 21%, emerging from volumetric growth with improved gas supply in 2015 and de-leveraging of balance sheet,” she said.
Published in The Express Tribune, December 4th, 2013.