Elixir Securities Limited – Short Report
Karachi, November 25, 2014 (PPI-OT): EFERT – Materialization of key triggers to lure investor interest
Concessionary gas – closer than ever
In their last analyst briefing, EFERT’s management highlighted that the three stakeholders, ie. EFERT, MARI and SNGP, had managed to successfully negotiate a working agreement to charge concessionary rate on Mari gas supply. The matter now rests with OGRA for final approval and concessionary rate shall start applying in the near future.
But confidence on KPD allocation has diminished
Elixir Securities Limited’s confidence on materialization of KPD gas allocation has wavered. Elixir Securities Limited assumes that the possibility of this gas allocation remains dim and that the government is unlikely to make a long term commitment to the fertilizer sector. Owing to declining confidence on the materialization of KPD, Elixir Securities Limited alters Elixir Securities Limited’s investment case for EFERT and removed Elixir Securities Limited’s assumption of additional gas starting from Jan-16.
Growth to continue in CY15
EFERT is set to post EBITDA of PKR25.8bn in CY15, up 16% relative to Elixir Securities Limited’s estimate of PKR22.2bn for CY14. EBITDA growth shall emanate from materialization of the concessionary gas arrangement. Furthermore, if the 60mmcfd temporary gas supply is extended for another year, CY15 EBITDA for EFERT shall clock in at PKR36.2bn, up a massive 63% YoY. Offing
Steep deleveraging to support earnings growth
Improving profitability shall allow EFERT to continue with its deleveraging trend and achieve debt free status in CY18. As a result, lower finance costs shall significantly support earnings growth for the company between CY14-18.
Payouts to remain strong going forward
With restrictions on cash payout out of the way, Elixir Securities Limited believes that the company shall start paying out dividends from CY14. Elixir Securities Limited expects the company to pay out DPS of PKR1.0/5.8 in CY14/15 translating into a payout ratio of 17%/70%. Elixir Securities Limited believes that EFERT shall gradually increase its payout to 100% by CY18 as its holding company, ENGRO, will utilize EFERT’s strong cash generation to finance future investments.
PT revised to PKR71; maintain BUY
Elixir Securities Limited tweaks Elixir Securities Limited’s estimates for EFERT and incorporated for: (i) Non-materialization of KPD gas, (ii) Steep deleveraging, and (iii) Higher payouts. Owing to the said revisions, Elixir Securities Limited reduces Elixir Securities Limited’s Jun-15 PT to PKR71/ sh (11%). Elixir Securities Limited maintains BUY on the stock as it offers 14% upside coupled with 2% dividend yield.
Upside from current estimates remains likely
Elixir Securities Limited believes that potential for upside from current levels remains strong. Key upside risks to Elixir Securities Limited’s base case for the company include: (i) Materialization of KPD, and (ii) Extension of 60mmcfd temporary gas.