Karachi, August 21, 2023 (PPI-OT): ENGRO: A value play with sustainable dividends

Engro Corporation Limited (ENGRO) offers a well-diversified exposure to Pakistan agriculture, consumer, connectivity, energy and chemicals space at a discount, where our SoTP based TP stands at Rs355; offering an upside of ~38%. Dividends are expected to remain on a sustainable track with 2024E D/Y of ~21%.

In terms of much awaited growth initiatives, Engro is working on feasibilities in the connectivity, petrochemical and renewable energy space. Final investment decision on the feasibility study for its US$2bn polypropylene project has been put on hold due to the uncertain macro-economic situation.

Engro Corp announced a relatively lower dividend payout in 2QCY23 of Rs2/share, however cumulatively, 1HCY23 dividend clocked in at Rs42/share. Earnings were reported at Rs5.9bn (EPS: Rs11.05) for 2QCY23, compared to a loss in the same period last year (driven by super tax impact). Engro's half year earnings clocked in at Rs19.7/share, a 43% YoY increase primarily due to higher earnings from dollar denominated businesses amid rupee devaluation.

Well-diversified conglomerate with consistent payout

Engro Corporation (ENGRO) is classified as a defensive investment due to its wide-ranging portfolio that encompasses fertilizer, consumer, petrochemicals, logistics, trading, and energy sectors. With several of its investments becoming highly profitable, ENGRO's potential dividend income is projected to maintain a steady and sustainable trajectory. Company’s cash and short-term investments accumulate to Rs39bn, which is 26% of the stock’s market cap. We have an SoTP based TP of Rs355, which does not include potential investment in the Petrochemicals space. Deployment of excess cash on balance sheet in profitable projects is a key trigger for the company.

Enfrashare continues to expand footprint

ENGRO is quite enthusiastic about its telecom and connectivity venture Engro Connect (EConnect). E-Connect’s subsidiary, Enfrashare added 315 additional towers during 1HCY23 taking the total operational sites to 3,644, a 24% YoY growth. Management, in its briefing on Friday, shared that Enfrashare witnessed the highest tenancy growth in 1HCY23 and closed the period with a 60% market share in the segment. Enfrashare achieved a tenancy ratio of 1.18x during the first half. ENGRO expects Enfrashare’s EBITDA to magnify due to economies of scale as more tenants come in at a marginal cost and impact of Solarization to save energy costs comes into play.

Work on Renewable Energy Park underway

ECORP’s subsidiary, Engro Energy in collaboration with Sindh Transmission and Dispatch Company and Directorate of Alternate Energy is working on the country’s 1st Hybrid Renewable Energy Park. Phase I of project will accommodate 400MW out of which 240MW would be attributable to wind projects and 160MW to solar. In its second phase, the project is expected to achieve a substantial scale of 1GW. Engro Energy has been granted a land allocation of 6,764 acres, and it has already secured commitments from potential customers for a capacity of 670 MW. Project is expected to achieve CoD by 4QCY25.

Propane Dehydrogenation project remains on hold

The polypropylene project's feasibility study has been concluded, with a designated budget of US$32mn covering tasks like Front-End Engineering Design and Technical studies. Yet, owing to the existing macro-economic circumstances, the Final Investment Decision has been deferred. The project's anticipated duration is approximately four years from the time of announcement of final decision.

Super tax dented Fertilizer and Chemical segments in 2QCY23

ENGRO announced a lower than expected dividend pay-out in 2QCY23 of Rs2/share, bringing half year dividend pay-out to Rs42/share. Engro Corp posted earnings of Rs5.93bn on a consolidated basis, translating into an EPS of Rs11.05 for 2QCY23 on 536mn shares compared to a loss in 2QCY22 – which was due to impact of super tax. Engro’s pre-tax profitability increased primarily due to effective cost optimization throughout the portfolio, combined with the devaluation of the Pakistani Rupee.

Engro Fertilizers Limited (EFERT) posted a profit of Rs1bn (EPS of Rs0.79) for 2QCY23 compared to a loss of Rs98mn (LPS of Rs0.07) during SPLY. EFERT showed an increase of 6ppt QoQ at the gross margin level in 2QCY23, mainly due to better retention prices. Finance cost increased by 21%/61 YoY/QoQ in tandem with rising interest rates. Additionally, business incurred a hefty super tax charge in June-2023 of ~Rs3.8bn which impacted the bottomline. Tax expenses also included impact of deferred tax liability of Rs1.5bn, in-line with our expectations. EFERT announced a dividend of Rs3/share for the quarter.

Engro Polymer and Chemicals Limited (EPCL) posted a Profit after tax of Rs1.6bn translating into an EPS of Rs1.72 for 2QCY23, 33% YoY decrease (1HCY22 EPS: 3.02, -61% YoY). Tax changes announced in the Finance Act (super tax and its deferred tax impact) implications wiped out around Rs1.2bn from the profitability. Along with the result, EPCL announced a DPS of Rs1.5, taking 1HCY23 DPS to Rs2.5. Apart from Super tax charge, reduced profitability was a result of the reversal of commodity cycle and diminished export margins. The economic deceleration led to decreased domestic demand, yet EPCL sustained PVC market share at over 90%.

Power and Terminal businesses on track

Following the expansion to 7.6MTPA, mining operations remained at an elevated capacity, providing coal to Engro Powergen Thar, Thar Energy, and ThalNova Power. EPQL posted increased profitability due to a combination of a higher period weighing factor and enhanced efficiencies resulting from higher dispatch levels. SECMC’s Phase-III expansion is underway and it is expected to take the existing capacity to 11.4MT/annum. The management is targeting to achieve CoD by mid of 2024. SECMC declared its first ever dividend of Rs8bn during the period. Engro’s Elengy terminal handled 37 vessels in 1HCY23 (37 vessels handled in SPLY as well) whereas Engro Vopak terminal handled 451kt of chemical volume in 1HCY23 versus 724kt in 1HCY22. Lower chemical was handled due to disruption in operations of key customers as a result of import restrictions and gas curtailment.