EGYPTFertilizers: The Valuation Disconnect
ABUK raised to OW. MFPC cut to UW. EFIC and EGCH initiated at UW.
Egypt / Fertilizers / Sector Note Core Coverage
In this note, we update our view on ABUK and MFPC and initiate core coverage on EFIC and EGCH. We also gauge the impact of the current natural gas supply cuts on the four EGX-listed fertilizers stocks if the issue is prolonged. Nitrogen fertilizers are heavy consumers of natural gas as a feedstock and are hence negatively impacted by any extended natural gas shortage or cut. Of the four stocks, we prefer ABUK (raised to Overweight, 12MPT EGP95/share) which trades at cheap multiples relative to its peers. On the other hand, we cut MFPC to )Underweight, 12MPT EGP39/share). We also initiate EFIC (12MPT EGP108/share) and EGCH (12MPT EGP10/share) as Underweight.
Impact of natural gas supply cuts will be minor if not extended
The recent heat wave in Egypt and the resulting natural gas supply cuts to fertilizer producers will negatively impact nitrogen fertilizer names if extended for longer. We estimate that a one-month cut in natural gas supply will reduce 2025 revenues and earnings by 9% and 15%, respectively, on average vis-à-vis our base-case scenario. All ABUK, EGCH, and MFPC will be negatively impacted, while EFIC will not be impacted since it is a phosphate fertilizer producer.
Global urea prices to remain firm in 2024
We expect global urea prices to be sustainable at current high levels throughout the remainder of 2024 for the following reasons:
China, the world’s largest exporter of phosphate fertilizers and top global urea supplier, recently announced tighter controls on nitrogen and phosphate fertilizers exports to maintain domestic price stability.
Growing urea demand in India, the top global urea buyer, which is usually covered by available Chinese urea supplies, Russia, and the Middle East.
The ongoing shortage of fertilizers supply as companies are reluctant to add new capacities.
All of the above will result in a tighter future global supply-demand balance and hence sustained higher prices. We expect global urea prices to drift higher over the coming years to USD400/ton in 2028.
Local urea price movement is essential
We expect local subsidized urea prices in Egypt will move higher following the recent EGP devaluation. We note that the latest movement in the subsidized prices was in November 2021 from EGP3,000/ton to EGP4,500/ton, implying a discount of 73% vs. global urea prices. That said, we think the movement of subsidized urea prices has been delayed over inflation concerns resulting from potentially higher food prices. In our models, we assume subsidized urea prices will increase in 2025 and 2027 by 50% y/y each to settle at EGP10,125/ton by 2027.
Summary of Changes
Abu Qir Fertilizers [ABUK]
Previous: 12MPT EGP60, Neutral / Moderate Risk
Current: 12MPT EGP95, Overweight / Moderate Risk
EFIC [EFIC]
Previous: —
Current: 12MPT EGP108, Underweight / Moderate Risk
KIMA [EGCH]
Previous: —
Current: 12MPT EGP10, Underweight / Moderate Risk
MOPCO [MFPC]
Previous: 12MPT EGP24, Neutral / Moderate Risk
Current: 12MPT EGP39, Underweight / Moderate Risk
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