Pakistan Short Report: (November-18-2013) Engro Fertilizers - IPO: Betting on more gas Investing in Engro Fertilizers public offering is betting on additional gas supply to run its second plant. Though they have efficiently managed to run their new plant (EnVen) on Mari gas and seek some interim gas allocations. But the actual value of the company will unlock if government provides them more gas to run both plants. With long-term gas plan on Economic Coordination Committee (ECC) agenda since last few meetings, there are bright chances that the new government may soon ratify the allocation made to four plants in Dec 2012, though the pricing of that gas is still uncertain. Amid this uncertainty, assigning a target price for Engro Fertilizers IPO is not easy and investors should take this IPO as a risky proposition that can generate above average gains or losses due to ambiguity on gas allocation. Looking at Sharif government’s seriousness to provide business friendly environment, we bet that more gas will be supplied to them but not at a discounted price. Thus, in base case, we value the stock at Rs27 compared to minimum offer price of Rs20. Based on one plant (worst case) we value it at Rs15 and based on two plants at subsidized rate (best case) at Rs37. New govt. ratification of long-term gas plan awaited Since the commencement of new US$1.1bn EnVen plant in 2011, the company faced severe gas outages being on SNGPL network. However, active attempts to secure gas supplies brought 60mmcfd gas from Guddu Power since July 2013 and 22mmcfd gas from Mari SML since April 2013. In Dec 2012, ECC under the previous govt. approved dedicated 202mmcfd gas to the consortium of four fertilizer manufacturers from five fields. Engro Fertilizers’ share is 79mmcfd. If the decision is ratified by the current ECC, additional gas may flow from 4Q2014 for which Engro Fertilizers will invest around Rs5.3bn for the pipeline. Debt restructuring and delay in dividends Engro Fertilizers total debt of Rs64bn in Sep 2013 is better than Rs72bn in Dec 2011. In recent debt restructuring, senior loans tenor has been extended by another 2.5 years with a new covenant restricting to pay dividend until 33% (or Rs17bn) of outstanding loans as at Jun 30, 2012 have been paid off. Thus, in base case, we expect Engro Fertilizers to pay first dividend for 2015 of Rs2 per share. Regards, Asad I. Siddiqui Salman Badami
Posted on: Mon, 18 Nov 2013 05:43:36 +0000
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