Engro Corporation, in a recent notification, announced that it has entered into a definitive agreement with Liberty Power Holding (Pvt.) Limited to sell its entire energy vertical, including Engro Power Qadirpur Ltd (EPQL, 69% stake), Engro Power Thar Ltd (EPTL, 51% stake) and Sindh Engro Coal Mining Company Ltd (SECMC, 12% stake) for a cumulative amount of PKR34.8bn or c.US$120mn (PKR64.8/sh). EPQL is being sold for PKR7.5bn, EPTL for PKR21.1bn and SECMC for PKR6.2bn.

Key highlights

We understand that Engro’s subsidiary Engro Energy will sell these assets and announce dividends to forward the proceeds to Engro Corp. As per our estimates, Engro Corp will receive after-tax dividends of PKR30.7bn (c.PKR57.2/sh).

Engro Corp took an impairment of PKR29.9bn on the book value of Engro Energy’s assets as it considered the reported book value to be higher than its recoverable amount (due to the accrued debt repayments included in the PAT of an IPP). Consequently after the charge, the stake adjusted book value is estimated at c.PKR12-13bn in Dec 2023 resulting in a one-time pre-tax profit of PKR21-22bn (after tax c. PKR29-30/sh).

The stock has rallied 49% since FYTD. We think that the market has been anticipating a one-time bumper dividend after completion of this transaction. Engro is expected to receive cash of PKR30.7bn (PKR57.21/sh). Presently, Engro has not yet disclosed any new investment plans. We think there is a good chance that Engro use most of the proceeds to pay large dividends. However we highlight that following the stake sales of EFERT and EFOODS in 2016-17, Engro did not increase its payout for that year by the transaction value. If Engro Corp again skips a large dividend and does not announce any major investment, the stock may underperform the broad market going forward, in our view.

Courtesy – IMS Research