Published On: Mon, Oct 14th, 2013

Engro Fertilizers Limited: Initial Public Offering

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Engro Fertilizers Limited (EFL), a subsidiary of Engro Corporation (ENGRO), plans to price its PkR1.5bn (targeted) IPO at the end of Oct’13, according to an investor presentation made by its executives on Oct 11 ’13. EFL, one of Pakistan’s major fertilizer manufacturing and marketing companies, is tapping into the capital markets to repay its debt obligations and fund its capex.

The company plans to issue 75mn ordinary shares at a floor price of PkR20/share, in addition to Engro Corp’s intention of divesting up to 30mn ordinary shares out of its existing stake in EFL at the strike price determined through the book building mechanism. In this regard, the book building process is aimed at the end of Oct’13 followed by the Initial Public Offering (IPO) after a subsequent period of 23 weeks. 

The Transaction

Engro Fertilizers Limited (EFL) will be the second IPO of CY13, and is expected to be listed on the Karachi Stock Exchange (KSE), as well as the Lahore Stock Exchange (LSE) next month. With regards to the nature of the transaction, the company explained its intent to float 75mn ordinary shares, 56.25mn of which (75% of the issue size) will be offered by way of book building at a floor price of PkR20/share using a Dutch (uniform price) auction. The remaining 18.75mn ordinary shares (25% of the issue size) will be offered to the general public at the strike price determined through the book building mechanism. In addition to this transaction, the parent company intends to divest up to 30mn ordinary shares out of its existing stake in the company at the determined strike price as well.

 

Company dynamics

The fertilizer company’s IPO comes amid improved company dynamics with regards to EFL’s growing market share and better gas scenario. According to data released by the NFDC, Engro’s urea sales rose by a substantial 66% in 8MCY13 with improved gas availability rendering into higher production for the company (up 131%YoY). Higher utilization of its efficient Enven plant along with the allocation of 60mmcfd of gas flow from Guddu to its base plant has allowed the company to operate both its plants at ~80% capacity. Subsequently, the company’s market share witnessed a significant improvement of 8ppts to clock in at 24% during the period. In terms of the future gas allocation arrangements, it has been reiterated that gas from the Reti‐Maru field is expected at the end of CY13, while that from Kunar Pasakhi Deep (KPD) has been pushed over from the previously expected Jul’14 to sometime in 3QCY14, citing a three month delay. In this regard, the company has put KPD related capital expenditures on hold and has expressed its intent to top‐up Enven production in the interim period until KPD is online.

Recall that as part of its debt re‐profiling, Engro had gained a 2.5 year extension of its loan tenure, along with amendments to certain covenants. This as well as Engro Corp.’s plans of divesting its fertilizer business are likely to have positive implications for the parent company’s cash flows, in addition to explicating EFL’s value for stakeholders of ENGRO. According to our estimates, at the offer price of PkR20/share (75mn shares), gains reflected in Engro Corp.’s stand‐alone accounts will translate into an earnings enhancement of ~PkR1.5/share for Engro Corp. shareholders.

Risks

Although gas supply from Mari is likely to continue, timely availability of gas with regards to the company’s future arrangements remains crucial. In addition, with the government having principally agreed to raise PkR105bn (0.4% of GDP) as gas levy in its recent Letter of Intent (LoI) to the IMF, gas tariff rationalization is likely on the cards, in our view. In this regard, local fertilizer players including EFL are likely to face margin attritions in case full cost is not passed onto consumers. However, we still await clarity regarding this matter.

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