January 08, 2023 (MLN): The share price of Engro Corporation (PSX: ENGRO) is expected to reach Rs490 by the end of December 2024, marking a potential upside of 57% mainly on the back of anticipation of potential special dividend, implementation of Weighted Average Cost of Gas (WACOG), expanding Enfrashare (Tower) business and anticipated resurgence of construction activities, according to a latest report by Topline Securities.

“Our liking for ENGRO primarily stems from (1) anticipation of potential special dividend through the sale of its Thermal Energy portfolio, (2) likely implementation of Weighted Average Cost of Gas (WACOG) to benefit EFERT, (3) expanding Enfrashare (Tower) business along with declining interest rates to enhance profitability, and (4) anticipated resurgence of construction activities leading to an increase in EPCL earnings,” the report reads.

One time special dividend

ENGRO has entered into discussions with Liberty Power to reduce its exposure in thermal energy assets which includes Engro Powergen Qadirpur (EPQL), Engro Powergen Thar Limited (EPTL), and Sindh Engro Coal Mining Company (SECMC).

“Based on our channel checks, ENGRO is planning to sell the majority of its stake in thermal assets for a cash consideration of around Rs30-40bn,” the report said.

The net cash inflows after tax would be Rs26bn (Rs48 per share) as per Topline’s estimates.

Assuming no major projects, and recent history of paying all excess cash as dividend, the brorekage house said they anticipate ENGRO announcing a one-time special dividend of Rs45 per share in 2025, bringing the total dividend to Rs91 per share for the year.

WACOG to benefit EFERT

EFERT is poised to emerge as the primary beneficiary of the implementation of the WACOG mechanism.

EFERT is currently being charged $5.6 per mmbtu (Rs1,600 per mmbtu) under Petroleum Policy 2012 (PP-12) on the feed gas at its base plant, that accounts for around 40% of its total urea production compared to other fertilizer players at $2 per mmbtu (Rs580 per mmbtu).

Since EFERT is already procuring around 40% of its total gas required in feed gas at higher rates, following the increase in Urea price post-WACOG implementation which is in line with other players, EFERT is expected to have a positive impact of Rs6 per share on its bottom line.

Tower expansion & expected decline in interest rates to revive Enfrashare’s profitability:

The business has progressed well in the last 5-years, with its portfolio of 4,000 towers by the end of 2023.

Going forward, ENGRO plans to extend its tower network by addition of around 750 towers every year, aiming to reach around 8,000+ towers by the end of 2028 with a tenancy ratio of 1.2-1.25x.

Due to record high interest rates, Enfrashare is expected to post a loss of Rs1.7bn in 2023.

However, with the expectation of a decline in average 6-month KIBOR from 21.6% in 2023 to 18.7% in 2024 and 17% in 2025, the segment's losses are expected to decrease to Rs0.1bn in 2024, turning into profits of Rs1bn in 2025 and Rs3.6bn in 2026.

Increase in PVC sales

In anticipation of a decline in interest rates in 2024, Topline Securities envisages a pickup in construction activities, leading to an increase in PVC demand.

EPCL’s PVC sales are expected to increase at a 5-Year (2022-2026) CAGR of 5% to 285k tons, it said.

The current annual capacity of PVC is 295K tons.

“However, as per our discussion with the management, the site has the capacity to increase production to 400K tons by incurring optimal capex,” it further added.

It is pertinent to note that higher than expected delays in conclusion of divestment of majority stake in Thermal Energy Assets, delays in WACOG implementation, significant drop in international Urea price, lower than expected decline in interest rates pose risks to this outlook.

These risks may not impact the current base performance but rather dent the potential upside mentioned.

ENGRO vs KSE100 Return Since 2020 (Unadjusted)

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Posted on: 2024-01-08T15:30:05+05:00