Abu Qir Fertilizers Company will be listed on the Egyptian Exchange in the second half of the year in line with the government's 20-25% share sale plan, sources told Daily News Egypt. The company's exports will rise to 70% from 55% currently by the end of the year, boosting underlying earnings. The company's earnings will also be supported in the medium term through expansion plans including ABUK-2, the $2bn greenfield methanol factory, and the $1bn Abu Tartur phosphate project. Naeem Research expects profit margins to drop in fiscal year 2019/20 (FY20), but to pick up starting FY21, expecting gas feedstock costs to go downward and exports to proportionally rise. Impacted by weak urea and nitrate fertiliser prices, Abu Qir's EBITDA margin is estimated to decline by 3pps in FY20. "While we estimate urea to recover at a marginal rate of 2% p.a. starting FY21, an expected drop in the price of natural gas feedstock is estimated to result in significant cost savings for Abu Qir during FY21-FY23. Abu Qir, which currently pays around $4.5 per one million British Thermal Units (MBTU) of gas feedstock (the highest among peers), is expected to benefit by a cut of $1.0/MBTU in FY21-FY22; resulting in savings of close to $22/tonne of urea produced. In addition, ABUK's earnings are also expected to be boosted by an increase in exports (resulting in a higher weighted price/tonne) which are estimated to amount to 70% of total sales in FY20 (55% currently)," Naeem said. Naeem values Abu Qir with a TP of EGP 26.37/share and recommend BUY. In spite of being zero-debt with stable cash flows and regular dividends (yielding 7%), the stock trades at a P/E FY21e of 10.1x; a 30% discount to most regional and international fertiliser peers. With 83% government ownership, ABUK is a fundamentally undervalued stock. Naeem also expects the valuation discount/market-mispricing to be eliminated as the company heads closer towards the government's 20-25% share sale plan execution.
