Misr Fertilizers Production Company (MOPCO)
 
Rating: Buy
Target Price: EGP120
Closing Price: EGP86

 
 One of the cheapest nitrogen plays out there; raise TP and reiterate Buy
We raise our TP for MOPCO 14% to EGP120 and tweak our estimates to reflect i) impact of CBE’s recent rate hikes on the EGP-denominated debt; ii) revaluation of the net fixed assets and subsequent impact on depreciation charges; as well as iii) rolling over our DCF. MOPCO today is being offered at the cheapest level among its global nitrogen fertilisers peers, which is totally unfounded, in our view. With the market having a better understanding of MOPCO’s true earnings potential, the stock has been reacting well over the past few months (c160% YTD), and turnover has improved considerably since the stock’s listing back in September. We also think that gas shortages are mostly now behind us, given that Egypt’s major gas discoveries are set to come on-line within 2017 and 2018. Accordingly, we estimate that MOPCO will enjoy a 90% operating rate in 2017 and 2018. Today, the stock is trading at an attractive 2018 P/E multiple of only c8x PE, given the c55% EPS growth that should be driven by urea prices improving to cUSD283/tonne in 2018; hence, we reiterate our Buy rating on the stock.
 
Dividends came early on to the scene; debt restructuring likely
MOPCO has decided to commence its dividend program earlier than anticipated and decided to distribute a cEGP458mn (EGP2/share), a small yield of c2.4% at current prices. We had assumed that the company would have taken a more prudent cash management strategy and deleverage a portion of its debt balances before distributing dividends. We have revised our dividend estimates, accordingly, for 2017 and onwards. This means MOPCO will likely need to restructure its debt facilities to maintain a cash buffer on its balance sheet. We are not alarmed by MOPCO’s c11.8bn net debt balances, which would reflect a reasonable net debt/EBITDA figure of 2.2x and a 2.8x EBIT interest coverage ratio; all amidst a trough urea pricing cycle. 
 
Global urea recovery is still developing
We still think the global urea market is on a recovery path, from the lows hit in 2016. We believe the wave of capacity additions is now behind us, and demand should outpace supply during 2018. This, in our view, should drive urea prices all the way up to average an Egyptian urea price of USD283/tonne in 2018 (17% Y-o-Y). Chinese export volumes have begun to see signs of normality, and we do not expect major capacity additions would come to an already oversupplied market. Accordingly, we think MOPCO is in a solid position to reap the benefits of a higher urea price, which should support a c55% EPS growth in 2018.

Ahmed Hazem Maher