Acquisition: Engro Fertilizers to buy commodity trading business for Rs4.4b

Objective of the purchase is to increase revenues and earnings.

KARACHI: Engro Fertilizers has decided to purchase Engro Eximp along with its UAE-based subsidiary, a stock exchange notice said on Wednesday.

Engro Eximp, which is a wholly owned subsidiary of Engro Corporation, undertakes commodity trading business for phosphate-based fertilisers, sugar, palm oil, wheat, rice and coal.

Unlike Engro Eximp, the fertiliser wing of the conglomerate operates as a publicly traded entity with 87% shareholding resting with its parent company.

The stated objective of Engro Fertilizers for the purchase is to increase its revenues and earnings. “The proposed transaction will also allow the company to create value through synergies and increase its footprint in agriculture inputs,” the company said.

However, market analysts believe the group’s holding company is getting rid of its trading subsidiary because the latter has been a loss-making entity for the most part of its existence.

Speaking to The Express Tribune, Topline Securities analyst Muhammad Tahir Saeed said the decision of Engro Fertilizers to purchase Engro Eximp will bode ill for the company’s stock in the short term at least.

“The purchase will have a negative effect on the share price of Engro Fertilizers. In contrast, the sale of Engro Eximp to one of its stand-alone subsidiaries is likely to have a positive impact on the stock performance of Engro Corporation,” Saeed said.



The purchase of the entire shareholding of Engro Eximp will be “for a consideration of Rs4.4 billion” based on an independent third-party valuation, Engro Fertilizers said.

Engro Eximp recorded a consolidated loss of almost Rs3 billion during 2014, although it had made a profit of Rs59 million in 2013.

Higher losses were caused by a substantial appreciation in the rupee-dollar exchange rate last March, according to the directors’ report for the third quarter of 2014. Moreover, deep bearish rice market sentiment prevailing in the first nine months of 2014 also offset the earnings from the phosphate business.

Engro Corp earns Rs7b

Meanwhile, Engro Corporation posted earnings of Rs7 billion for 2014 on Wednesday, down 10.2% from Rs7.8 billion in 2013.

The net profit that the company booked in the fourth quarter of 2014 amounted to Rs2.6 billion, which is 17% higher than the profit of Rs2.2 billion recorded in the same quarter of the preceding year.

The company also announced a final cash dividend of Rs4 per share, taking the total payout to Rs6 per share in 2014.

The drop in the bottom line seems to be the result of increased cost of sales during 2014. It amounted to Rs139.7 billion, up 22% from Rs114.8 billion last year.

Saeed said the higher cost of sales was the result of higher gas prices following the imposition of Gas Infrastructure Development Cess (GIDC) on feed and fuel stock in 2014.

Published in The Express Tribune, February 19^th,  2015.

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