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Abu Qir Fertilizers [ABUK]
Egypt / Materials / Core Coverage Report
12MPT: EGP26.0 (+30%)
set on 5 July 2021
Investment Rating: Overweight | Risk Rating: Medium
Key Insights
Egypt’s most diversified fertilizer manufacturer
Abu Qir Fertilizers [ABUK] is one of the most diversified fertilizer manufacturers in Egypt with a saleable capacity of 2.3mtpa. ABUK has overcome many of its operational challenges, including price hikes and low supplies of natural gas, which led historically to lower utilization rates. Despite local restraining factors, such as local sales quota, ABUK’s profitability is still unquestionably well-anchored.
Selling capabilities impacted by COVID-19
Subdued trade mobility on the global front affected ABUK. Management indicated that a considerable chunk of export volumes was directed towards African destinations, which relatively pressured selling prices in H2 2019/20. Another global economic shutdown could be worrisome if trade mobility witnessed another halt. However, we argue that the nitrogen fertilizer market will continue to be the most resilient across global commodity markets due to its importance to global food security.
Further growth to come from expansion
ABUK’s future top line growth is tied with potential capacity upgrades (i.e. Abu Qir III expansion). This is because the current operating rates are nearly 100%, and prices are expected to normalize in the near future.
Valuation, Investment Thesis, & Risks
Overweight / Medium Risk, 12M PT EGP26.0/share (+30%)
We valued ABUK using a DCF approach, reaching a fair value of EGP22.6/share. This implies a 12-month PT of EGP26.0/share (+30%), hence our Overweight rating. Our DCF assumes a terminal WACC of 13.2% and a long-term growth rate of 3%. Our projections include Abu Qir III expansion but exclude any impact related to ABUK’s upcoming methanol venture. However, we are keeping an eye out for any updates on the technical and financial feasibility of the methanol plant. Initially, we think the methanol facility will be value accretive if natural gas were to be supplied at USD3.5/mmbtu or less.
Still offering reasonable return on recent price correction
ABUK’s stock price rallied notably since October 2020, coming very close to our 12M PT last January when higher urea prices fueled investors’ appetite. However, ABUK price corrected later with the whole market. Today, ABUK is trading at 2021/22 EV/FCF of only 10.6x.
Investment thesis
Favorable nitrogen fertilizer market, possibility of a natural gas price cut, liberalization of local prices, and qualifying for free zone status.
Risks
Soft global urea prices, appreciating local currency, and continued threats to trade mobility posed by COVID-19.
Mohamed Saad
Senior Equity Analyst
T +202 3300 5719