KEY THEMES
Below, we highlight the key takeaways from Abu Qir Fertilizers’ [ABUK] 2020/21 results call held last Thursday:
It’s about four years till Misr Methanol & Petrochemicals comes alive: The process of selecting a contractor will take up to one year, followed by a 3-year lead time for the facility to begin operations. Management indicated that a financial feasibility was previously conducted three times (before, during, and after 2020). The feasibility study yielded IRRs ranging between 17% and 23% on equity investments. The project will target Southeast Asian markets. Moreover, the pricing of natural gas, the key feedstock, will be at USD4.5/MMBtu. While qualifying ABUK for a free zone status awaits further legal details, the methanol project will enjoy an economic zone status, with privileges very close to that of the free zone.
Studies for the new facility targeted on RAKT’s land to be released mid-September 2021: Earlier this year, ABUK acquired an 80-feddan land plot from Rakta [RAKT] to build either an Ammonium Nitrate unit with a capacity of 2,400 mtpd or a Calcium Ammonium Nitrate (CAN) unit with a capacity of 3,000 mtpd. Management likes to call the project as Abu Qir IV, due to the proximity of acquired land to ABUK’s current three main factories.
Management shares an upbeat outlook for global nitrogen fertilizer prices: The rally in urea prices, which pushed prices firmly beyond USD400/ton, is not expected to continue at the same pace. However, management believes that over the short term, prices should hold their ground close to the USD400/ton level. Moreover, over the medium to long term, management thinks of the USD300/ton level as very attainable, besides being very profitable, compared to pre-COVID-19 levels.
Liberalization of local selling prices is not entirely off the table: ABUK is committed to supplying the local market with a monthly quota of 77,000 tons of fertilizer products at subsidized prices. Without committing to the aforementioned monthly quota, the company will not be able to export any of its products. Management indicated that different scenarios are being discussed with the government regarding different forms of partial or full liberalization of local selling prices. While management insisted that the options being discussed are complex and subject to various modification, one suggestion proposed by companies is to provide the subsidies in cash rather than a discount on the sack’s price. If it were not for the local quota, ABUK would have achieved a bottom line close to EGP4.6bn instead of EGP3.5bn, according to management.
ABUK is currently traded at 2021/22e P/E of 6.8x and EV/EBITDA of 8.2x. We remind you that we have an Overweight rating on the name, with 12-month price target (12M PT) of EGP26/share, implying an upside potential of +35%. Key catalysts are: (1) liberalization of local urea prices, (2) ABUK qualifying for the free zone status, and (3) any cut in natural gas prices by the Egyptian government, as a cut of USD1.0/MMBtu will add a 20% upside to our 12M PT.