Karachi, February 17, 2023 (PPI-OT): ENGRO: Propane dehydrogenation project on hold; other growth initiatives on track

Uncertain macro-economic situation has led to Engro Corporation Limited (ENGRO) putting the final decision on the feasibility study for its US$2bn polypropylene project on hold, shared by the management in yesterday’s Corporate Briefing Session. In terms of growth initiatives, ENGRO is working on a number of feasibilities in the connectivity and renewable energy space.

ENGRO posted 13% YoY lower earnings at Rs42.23/sh in CY22 results announced yesterday, largely owing to super tax in 2QCY22. Earnings for 4QCY22 clocked in at Rs15.45/share, +88% YoY. The company announced a relatively lower DPS in 4QCY22 of Re1, consistent with its historical practice of lower payout in 4Q. Cumulatively, CY22 DPS clocked in at Rs34.

We maintain our Buy call for ENGRO offering a well-diversified exposure to Pakistan’s agriculture, consumer, connectivity, energy and chemicals space. Our SoTP based TP stands at Rs356. Dividends are expected to remain on a sustainable track with a 2023E D/Y of ~13%. The ongoing buy-back in the stock, initiated today, is an added trigger to its performance.

Dividend remained elevated despite lower earnings in CY22

Engro Corporation (ENGRO) announced its annual results yesterday, posting lower earnings for CY22 of Rs42.23/share, a 13% YoY decrease primarily due to the super tax charge in 2QCY22. ENGRO’s profitability dropped due to lower contribution from Chemical and Fertilizer businesses this year. During the year, company’s flagship fertilizer business also skipped dividend due to higher tax and exchange losses. Despite lower earnings, ENGRO announced a dividend pay-out of Rs34/share during CY22, higher compared to Rs25/share dividend announced for CY21. The lower pay out by ENGRO in 4QCY22 was consistent with historical practice where we have observed that a higher pay-out is witnessed in first three quarters.

We believe the company offers a well-diversified portfolio (exposure to Pakistan’s agriculture, consumer, connectivity, energy and chemicals space) and is currently trading at a discount. With a number of prospective fruitful investments, ENGRO’s dividend stream is expected to continue to remain on a sustainable track with a CY23E D/Y of 13% and leads us to maintain our “Overweight” stance on the conglomerate. We have an SoTP based TP of Rs356, which does not include potential investment in the Renewable and Petrochemicals space.

Enfrashare remains focused on growth

The management of the company, in its Corporate Briefing Session held yesterday, shared that it is quite enthusiastic about its telecom and connectivity venture, ENGRO Connect (EConnect). The management apprised that E Connect’s subsidiary, Enfrashare has added 1,083 towers during CY22 taking the total operational sites to 3,329 towers with 197 towers being added in the last quarter. Management shared that company witnessed high tenancy growth during CY22 and closed the period with a 52% market share in the segment. Enfrashare achieved a tenancy ratio of 1.17x during the year. The company plans to host more than 5,000 towers by CY24. EBITDA is expected to improve due to economies of scale as more tenants come in at a marginal cost. The business is also using solarization to save up on energy costs with many locations currently being powered by solar energy.

Renewable energy park to eventually scale up to 1GW

Engro Energy and Sindh Transmission and Dispatch Company have agreed to collaborate on the development of Pakistan’s first hybrid renewable energy park. Phase I of project will accommodate 400MW out of which 280MW would be attributable to wind projects and 120MW to solar. The project is expected to eventually scale up to 1GW. The project is expected to contribute toward ENGRO’s sustainability goals.

Propane Dehydrogenation project on hold for now

Management shared that feasibility study of the polypropylene project has been completed. To recall, an amount of US$32mn was allocated for the feasibility studies including the Front-End Engineering Design and Technical studies. Management shared that the Final Investment Decision has been put on hold given the country’s macro-economic conditions. The project is expected to take around 4 years from the date of announcement of the final decision.

Fertilizer and Chemical businesses book partial tax reversals

Engro Fertilizers Limited (EFERT, 56% holding) posted earnings of Rs16bn (EPS of Rs11.98) during CY22, a drop of 24% YoY. The company showed a decline at the gross margin level as well, mainly due to increased manufacturing costs for the company specially the higher cost of gas due to elevated PP12 gas rates. The one-time 10% super tax charge was also among the key reasons for a lower bottom line, the company however booked a tax reversal in the last quarter to the extent of 6% provision of Super Tax applied on CY21 profits, post Sindh High Court stay on the same. EFERT believes that since taxes cannot be applied retrospectively, 6% tax out of the 10% charged was discriminatory. For the full year, EFERT announced a dividend of Rs13.5.

Gas is a major cost for EFERT and with the recently announced increase in gas rates, the company would have to raise Urea price by around Rs 295/bag to pass on the impact. We highlight that ~73% of the gas used by EFERT is now charged at Fertilizer Policy rates. Since gas prices are not yet notified for Mari Petroleum Company Limited (MPCL) network fertilizer companies, price increase for urea by EFERT and FFC is on hold for now until further clarity. It is likely that rates for MPCL clients will be in-line with gas tariff hikes for SNGP and SSGC announced by the government earlier this week.

Engro Polymer and Chemicals Limited (EPCL, 56% holding) also posted a decline in profitability of 22% on YoY basis. Profit after tax came in at Rs11.7bn translating into an EPS of Rs12.9 for CY22 (CY21 EPS: 16.6). The company witnessed a decline in core-delta during the period however, partial reversal of super tax booked by the company in 4QCY22 somewhat offset the negatives.

Power and Terminal businesses faced some hiccups

Engro Powergen Thar Ltd (EPTL) and Engro Powergen Qadirpur Ltd (EPQL), dispatched 4,500GWh to the national grid. EPTL’s availability was low during CY22 as the plant was faced with an incident during 1QCY22 for which the company had also booked a provision of Rs2.3bn on the plant. Post the incident, however, rehabilitation work was duly undertaken and both units of EPTL resumed operations.

SECMC’s Phase-II expansion was achieved during the year which doubled the existing capacity to 7.6MT/annum. Phase-III of the expansion has also been approved by the Board which would take the capacity to 11.4MT/annum, the management expects phase-III’s CoD by CY24. The cost of Thar coal in comparison to imported coal is expected to become significantly lower post completion of phase-III.

ENGRO’s terminal businesses handled 219Bcf LNG which adds up to 15% of the national gas supply whereas the share in LPG market stood at 37%. Company had earlier highlighted that LPG marine imports remained subdued during the year however chemical products handling supported the operational inflow and occupancy.