TAKEstock: Natural Gas Price Hike
What new higher NG prices mean for EGX stocks and sectors
Impact: NEGATIVE | Degree: STRONG
set on 31 October 2021
On Friday, the Egyptian government said it will raise natural gas prices for certain industries effective 1 November 2021 (tomorrow), as follows:
•Fertilizer and petrochemical industries will be supplied with natural gas at USD5.75/MMBTu or according to the pricing formula stated in their respective contracts.
•Cement and iron & steel industries will also be supplied with natural gas at USD5.75/MMBTu.
•All other industries (including ceramics, for example) will be supplied with natural gas at USD4.75/MMBTu.
The new natural gas prices represent a 28% hike vs. the USD4.5/MMBTu charged previously. In this note, we look at the companies and sectors in the EGX universe that we believe will be most impacted by the surprise decision. We note that Sidi Kerir Petrochemicals [SKPC] should not be impacted because it pays for natural gas using a pricing formula.
Abu Qir Fertilizers [ABUK]
Our fair value (FV) for Abu Qir Fertilizers [ABUK] was previously set at EGP22.6/share with a 12-month price target (12M PT) of EGP26.0/share. However, our valuation and hence price target did not reflect the recent rally in global urea prices. Had we left natural gas prices unchanged at USD4.5/MMBTu, our FV would have risen to EGP27/share with a 12M PT of EGP31/share. However, applying the now-higher natural gas prices, our FV would be trimmed to EGP21.9/share with a 12M PT of EGP25.4/share. Nonetheless, this still offers an 18% upside off Thursday’s market close.
MOPCO [MFPC]
MOPCO [MFPC] has long been unfazed by any changes in natural gas prices charged by the Egyptian government because it enjoys a long-term agreement whereby it is subject to a pricing formula linked to global urea prices. Indeed, this pricing formula has helped MFPC outperform its local and regional peers with regards to profitability; natural gas was supplied mostly at a price below USD4.0/MMBTu. However, MFPC’s current agreement is set to expire after 2023, leaving the fate of natural gas pricing post 2023 completely unknown.
Egypt Kuwait Holding [EKHO/EKHOA]
Alexfert (55.4% owned by Egypt Kuwait Holding Co. [EKHO/EKHOA]) sells urea in addition to ammonium sulphate. On average, Alexfert’s annual consumption of natural gas is 20.8mn MMBTu at a price of USD4.5/MMBTu. Raising natural gas prices will cause Alexfert to incur an additional natural gas cost of c.USD26mn. In return, this will dent Alexfert’s bottom line by USD20.2mn, implying USD11.2mn attributable to EKHO. Thus, the per-share negative impact on EKHO would be c.USD0.08/share. This, in turn, means that the per-share negative impact on EKHOA would be c.EGP1.3/share.
Ezz Steel [ESRS]
Ezz Steel [ESRS] had a wonderful make-believe turnaround story during H1 2021, where finally selling prices improved to capitalize on lower natural gas and electricity costs. Indeed, ESRS was successful in achieving an EBITDA of EGP5.3bn, implying an EBITDA margin of 17.3%, during H1 2021. Given successive price hikes that took place since late H1 2021 until recently, we believe H2 2021 is bound to be even stronger than H1 2021, thus writing a successful end to an exceptional year.
Egypt Cement
Generally speaking, we see the higher natural gas prices having a neutral impact on Egyptian cement manufacturers. This is mainly because Egyptian cement manufacturers already depend on coal as their main source of energy. That said, we now believe that the potential shift back from coal to natural gas be put on the backburner for now since it would be more cost effective for them to use coals as opposed to the now-higher natural gas prices.
Egypt Ceramics
We see a minimal negative impact on certain Egyptian ceramics manufacturers as a result of now-higher natural gas prices. We note that the year 2021 has so far witnessed a strong recovery for the industry. With only two months left in 2021, we do not see the companies badly hurt. That said, we think the recent hike in natural gas prices will impact the cost of goods sold (COGS) by only 1%, which we think can be easily absorbed this year.
Mohamed Saad
Senior Equity Analyst
T +202 3300 5719
Dina Abdelbadie
Equity Analyst
T +202 3300 5716