Engro Chemical Pakistan Limited (ENGRO) came into existence in 1991 as a urea manufacturing concern. The company has since diversified and expanded into several businesses ranging from dairy to bulk handling. ENGRO today consists of the core fertilizer business with a capacity of 975K tpa for urea and several subsidiaries namely Engro Foods Limited (EFL), Engro Vopak Terminal Limited (EVTL), Engro Eximp Limited (EXIMP), Engro PowerGen Limited (EPGL), Engro Energy Limited (EEL), Engro Polymer & Chemicals Limited (EPCL) and Avanceon Limited (EIAL).
Secure Markets
ENGRO’s value stems from its vision of expanding into operations that have a synergistic relationship. For example, EFL is able to leverage the existing distribution network of fertilizer. EPCL finds itself supported by EVTL’s chemical handling capability. These synergies aid the company’s extremely ambitious expansion plans. Furthermore, these expansion plans are in business lines with secure market demand, secure pricing and huge growth potential. For its fertilizer division, the international to local urea price differential and domestic shortage helps secure pricing power while EEL reaps the benefits of guaranteed USD Internal Rate of Return (IRR) regime under the Power Policy. Similarly, EVTL and EPCL are virtually monopolies commanding significant market share in their respective businesses.
Robust Business Growth
We expect ENGRO’s revenues to register a 3-yr CAGR of 34.3% (CY08A-11E), primarily on account of higher volumetric offtake. Gross profit is projected to register a 3-yr CAGR of 58.7% over the same period as economies of scale will help expand gross margins. We expect Engro Foods and Engro Energy to start paying dividends by CY11E.
Valuations
Our fair value for ENGRO is PKR219/share, derived through Sum-of-the-Parts based analysis for its business units including fertilizer, EVTL, EFL, EEL and EPCL.
