KEY THEMES
Yesterday, we issued our Core Coverage Report on Abu Qir Fertilizers [ABUK], a stock we first picked back on 1 February 2021 when we published STANDPoint “Egypt 2021 Investing Playbook” along with 19 other EGX-listed stocks. There are plenty of factors that shape our view regarding ABUK which include but are not limited to:
ABUK is Egypt’s most diversified fertilizer manufacturer: 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.
Further growth to come from expansion: ABUK’s future top line growth can be linked to 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.
Overweight / Medium Risk, 12M PT EGP26.0/share (+33%): 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.