AKD Quotidian about — ENGRO: 1HCY11 Analyst Briefing Update

Karachi: ENGRO held its analyst briefing yesterday to discuss the performance of its subsidiaries in 1HCY11 along with the business outlook.

According to AKD Securities, ENGRO earnings for 1HCY11 were flat at PkR3,381mn (EPS PkR8.60) while NPAT for 2QCY11 was lower by 35%QoQ to PkR1 ,327mn (EPS PkR3.37) largely due to lower earnings from cash cow `Fertilizer subsidiary’. Similarly EPCL also held its analyst briefing yesterday. Key excerpts from both the briefings are provided below. AKD Securities will shortly update investors with AKD Securities’ revised investment case for ENGRO.


Engro Corp. 1HCY11 earnings review



(PKRmn) Revenue  YoY  PAT YoY Revenue  QoQ PAT  QoQ
Fertilizer 12,146 29%  2,175 8% 6,264 6% 778 -44%
Polymer 8,031  17% (195) -57% 3,907 -5% (136) 131%
Eximp 7,631 48% 314 -68%  4,458 40% 150 -9%
Vopak 1,014 -5% 478  -8% 520 5%  239 0%
Foods 13,652 43% 217  nm 7,221 12% 100 -15%
Power 3,781 88% 745 97% 1,937 5% 400 16%
Avanceon 705 -7% -65 -31% 335  -9% (56) 522%
Engro Corp.* 46,084 37% 3,381  0% 24,236 11% 1,327 -35%



Fertilizer: Earnings of the Fertilizer subsidiary were up by 8%YoY in 1HCY11 as higher urea sales (+1 7%YoY to 575k tons) following increased production (+17%YoY), coupled with stellar margins on both urea and Zarkhez’ to prop up the Fertilizer bottom line in 1HCY11. On a segment wise basis, urea and Zarkhez segments’ NPAT were up by 20%YoY and 68%YoY, respectively, to PkR1.8bn and PkR314mn in 1HCY11. For 2QCY11, NPAT was down by 44%QoQ due to higher interest charges as most of the interest expense relating to ENVEN post Apr 30, 2011 was expensed, which had an after tax impact of PkR844mn. Urea production from the new plant has been recorded at 139ktons while the new plant faced gas outages of 113 days in 1HCY11. Production on the old plant was down by 10%YoY in 1HCY11 owing to gas curtailment on the Man network. Going forward, 2HCY11 will likely be challenging for the Fertilizer business given that the new plant would be shut down for one month owing to Qadirpur ATA (annual turnaround). The company will not raise its urea price in response to the ATA which is already part of the GSA, while prior price hikes had already taken into consideration the Qadirpur ATA. Furthermore, AKD Securities flags possible floods as a potential risk to fertilizer operations in the near term, which would impact ENGRO the most given its tight cash flow situation. On the gas curtailment issue, the rngmt. was of the opinion that the GoP may opt for lower load shedding for urea plants given the potential shortfall of up to 1 .5mn tons, which would have to be bridged by expensive imports. In this regard, gas availability to fertilizer units on SNGP has been -75% since Jul’11.

Eximp & Power: 1HCY11 was disappointing for Eximp with NPAT falling by 68%YoY as lower phosphate trading margins as well as a PkR248mn loss from rice operations has curtailed earnings. The loss in `Rice’ business was in line with business strategy. Going forward, further investment in the `Rice’ business coupled with initial losses would likely curtail Eximp payout and earnings growth. Performance of the Power subsidiary was one bright spot for ENGRO in 1HCY11 where the subsidiary earnings were up by 97% YoY while it also paid a dividend of PkRO.86/share.

EPCL, still struggling to manage VCM: Despite robust spread between PVC and ethylene, profitability of EPCL remains under pressure as the company has struggled to manage smooth operations of the critical VCM plant. VCM production in 2011 was at 21k tons, which was higher than 1QCY11s production of 14k tons, but still lower than the highest production of 28ktons recorded in 4QCY1O. Resultantly, the company has had to purchase expensive VCM at spot rates which has hurt profitability. VCM production in 3QCY11 is again expected to remain low following a fire incident at Furnace B of the VCM, while the other furnace has been closed for maintenance. Needless to say, stability in VCM operations will remain the key to long term profitability of EPCL.

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