A review of Engro Corporation financial results

Engro Corporation (ENGRO) announced 2QCY20 consolidated NPAT of PKR5.74bn (EPS: PKR9.97) as compared to PKR2.79bn (EPS: PKR4.86) in SPLY, up 105%yoy. The strong rebound in earnings of EFERT and the commencement of SECMC and Thar power plant (660MW) are attributed majorly for the rise in earnings. Moreover, the share of income from associates has also increased by 3.1x yoy mainly on account of higher profitability from Friesland Campina (dairy business). This takes the 1HCY20 profitability to PKR9.06bn (EPS: PKR15.73), up 33% yoy. The result announcement was accompanied by an interim cash dividend of PKR8.0/sh, taking cumulative 1HCY20 payout to PKR14.0/sh.

2Q20 Key result highlights:

Net revenues jumped significantly by 48%yoy to PKR62.2bn mainly on account of higher revenue from fertilizer business and commencement of operations of Thar based coal power plant (660MW), which contributed about 22% to the topline (as per our estimates).

In the Fertilizer segment, EFERT posted consolidated 2QCY20 NPAT of PKR3.9bn (EPS: PKR2.91), up 22% yoy, taking 1HCY20 NPAT to PKR4.45bn (EPS: 3.34), down 38%yoy. The decline in 1H profitability was due to (i) reduction in GIDC on natural gas, and (ii) the subsequent decline in Urea prices, and (iii) decline in other income by 83% yoy, as EFERT booked a gain on disposal of Engro Eximp FZE in 1HCY19,

Finance cost increased by 66% yoy to PKR5.2bn as compared to PKR3.1bn in the corresponding period last year due to higher debt amid lower interest rates.

Among other line items (i) share of income from associates increased to PKR873mn, up 3.1x yoy, indicating a rebound in profitability from their dairy business, (ii) effective tax rate has decreased to 25% as compared to 50% in 2QCY19 due to a one-off tax reversal booked last year. However, we await the financials for more clarity.

We expect that earnings of ENGRO in remainder of CY20 will be not be as handsome as in the present quarter, as it will be negatively affected by the unfavorable judgment on GIDC by the Supreme Court. As per the ruling, EFERT has to pay PKR48.6bn, whereas the company has only booked PKR13.9bn in its payables. The final outcome of this remains largely uncertain for EFERT. On top of that EPCL will also have to pay PKR5bn to retire its GIDC payable. We believe that ENGRO might have to help EFERT to pay its outstanding liability as the company has cash reserves of more than PKR60bn. (Intermarket Securities Limited.)

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