Engro Corp. a conglomerate with diversified business portfolio was a favorite growth stock of every investor and equally for analyst till few weeks back. Unusual delay in COD and gas supply concerns built negative sentiment. As a result stock has been going through selling trend in last 3 months from a high of PKR 205.78/ share on 31st Mar11 reflecting a downfall of (-25% to date).
Owing to gas availability issues to Enven (Engro’s new plant), the company had no option but to increase the urea price to cover the production loss and investors preferred to switch from Engro to FFC/FFBL/FATIMA because these companies were the beneficiaries of this blessing. Moreover gross margins of both the Fauji stocks marched up to historic highs which raised up CY11 earnings expectations.
Engro’s fundamentals are very strong, as far as growth story is concerned it is still intact and investors concerned regarding ability to payoff loans are vague. As per company’s management Engro would be able to post EBIT of (Rs29-31 bn) moreover company would also generate cash flows through IPO of Engro Fertilizer in 3Q11 and already launched Engro Foods, moreover Engro Energy IPO is also in the pipeline. Company’s debt repayment is expected to be PKR20 bn in CY11, but the positivity side of the picture is significant reduction in debt from the company’s balance sheet.
On the gas front the other major concern of investors, Enven has air tight Gas sales agreement which provides comprehensive legal cover. We believe gas supply issue would be resolved within 2H11 and dedicated gas supply would be available to the plant. Consequently 2012 could be the year for the company with optimum production; on the other hand urea prices would also come down between PKR 925-1,000/ bag considering current feed/fuel gas price. Moving forward any upside in fuel/feed gas would benefit Engro Enven because the plant’s gas price is fixed for 10 years.
Owing to gas availability issues to Enven (Engro’s new plant), the company had no option but to increase the urea price to cover the production loss and investors preferred to switch from Engro to FFC/FFBL/FATIMA because these companies were the beneficiaries of this blessing. Moreover gross margins of both the Fauji stocks marched up to historic highs which raised up CY11 earnings expectations.
Engro’s fundamentals are very strong, as far as growth story is concerned it is still intact and investors concerned regarding ability to payoff loans are vague. As per company’s management Engro would be able to post EBIT of (Rs29-31 bn) moreover company would also generate cash flows through IPO of Engro Fertilizer in 3Q11 and already launched Engro Foods, moreover Engro Energy IPO is also in the pipeline. Company’s debt repayment is expected to be PKR20 bn in CY11, but the positivity side of the picture is significant reduction in debt from the company’s balance sheet.
On the gas front the other major concern of investors, Enven has air tight Gas sales agreement which provides comprehensive legal cover. We believe gas supply issue would be resolved within 2H11 and dedicated gas supply would be available to the plant. Consequently 2012 could be the year for the company with optimum production; on the other hand urea prices would also come down between PKR 925-1,000/ bag considering current feed/fuel gas price. Moving forward any upside in fuel/feed gas would benefit Engro Enven because the plant’s gas price is fixed for 10 years.
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