Listing of Engro Fertilizers to provide cash cushion

Engro Corp’s fertiliser arm will be quoted on stock market by year-end.

KARACHI:

Engro Corporation is going to list its fertiliser business on the stock market by the end of 2013 which, according to analysts, will provide the largest private-sector conglomerate of the country with a substantial cash cushion.

Engro Fertilizers, which is a wholly owned subsidiary of Engro Corporation, made the announcement in an analyst briefing held on Wednesday, where it also discussed the company’s financial performance during the first quarter of 2013.

According to brokerage firm Foundation Securities, which is affiliated with Macquarie Capital Securities Limited, a global securities company, the initial public offering of Engro Fertilizers may have a total market capitalisation between Rs59 billion and Rs66 billion, assuming a price-to-earnings (P/E) multiple of five to six times.



“Assuming Engro Corporation divests a 10%-20% stake of its holding (in Engro Fertilizers), this would provide a big cash relief of Rs6-12 billion,” said a research note issued by Foundation Securities on Thursday.

From a loss-after-tax of Rs1.4 billion in the first quarter of 2012, Engro Fertilizers posted a profit-after-tax of Rs646 million in the corresponding period in the current year.

“The strong 1QCY13 result was on the back of higher production and a three-fold rise in urea off-take, mainly due to efficient operations of its Enven plant, which received major gas supply from Mari (93 mmscfd) and small quantity from SNGPL (around 12-13 mmscfd),” according to a research note prepared by Elixir Securities, a brokerage house based in Karachi.

With net sales of Rs9.7 billion, Engro Fertilizers registered a year-on-year increase of 203% in its topline at the end of the first quarter of 2013.

A consortium of fertiliser companies has signed a long-term gas supply agreement with Oil and Gas Development Company (OGDC) at the weighted average cost of approximately $4-4.50 per mmbtu, including tolling charges, the research note of Foundation Securities said.

However, the sovereign guarantee that Engro Fertilizers had received at the time of establishing its Enven urea plant promised that it would be provided 100 mmbtu of gas at the rate of $0.75 per unit.

By agreeing to the weighted average gas price of up to $4.50 per mmbtu, Engro Fertilizers has now effectively accepted the fact that the sovereign guarantee of the government is practically of no use.

“The gas prices agreed are fixed for the long term. Contrary to general expectations, we do not rule out the possibility of a levy on gas (GIDC), which can raise effective gas prices to $5-5.50,” the research note said.

Engro Fertilizers also apprised analysts of the ongoing debt re-profiling as debt restructuring of a major local loan is likely to be completed in the second quarter, which will be followed by re-profiling of the rest of the loans.

The long-term debt of Engro Corporation in 2012 was Rs67 billion. It is likely to come down to Rs49 billion in 2013, estimates Foundation Securities. Engro Fertilizers does not make its balance sheet public.

“Coupled with the listing of Engro Fertilizers, debt re-profiling should provide Engro Corporation (with) much-needed breathing space until the long-term gas supply plan comes online,” the note added.

The net debt-to-equity ratio of Engro Corporation in 2012 was 162.6%, which is expected to drop to 125.9%.

“Clarity on gas supply … and Engro Corporation’s plans to list its fertiliser arm by year-end may serve to unlock the valuation and provide big cash relief,” it noted.

Published in The Express Tribune, April 26^th, 2013.

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