ENGROH signed a 12-year contract with Pakistan Mobile Telecommunications (PMCL).

Topline Pakistan Research has published a report on Engro Holdings (ENGROH), noting that earnings have been revised up and Buy Sta maintained. A detailed report said, “We reiterate our BUY stance on ENGROH as the company is trading at a discount of 39% at the current price of Rs229 compared to the SOTP value of Rs373/share.” Our liking for this scrip is based on (1) the addition of thermal assets back to its continued operation, as its divestment deal couldn’t materialize previously, and (2) the completion of the deodar deal and turning of Enfrashare into profit.

We expect thermal assets, including Engro Powergen Thar Limited (EPTL), Sindh Engro Coal Mining (SECMC), and Engro Power Qadirpur (EPQL), to add Rs16.91/share to the consolidated profits of the company in 2026.

Besides this, the newly inducted tower assets of deodar are also now part of Engro Connect, and this shall start contributing to the overall profitability of the company alongside Enro Enfrashare. We expect both companies (Enfrashare and Deodar) to add Rs4.30 and Rs5.67/share in 2026 and 2027, respectively.

We expect the company to post recurring EPS attributable to profit of Rs23.1, Rs35.1, and Rs43.0 in 2025, 2026, and 2027, respectively. Recurring earnings exclude the impact of one-offs reported due to the inclusion of its thermal assets in the Jun 2025 quarter. On the dividend side, we expect lower payouts in 2025 and 2026, as funds available will be allocated to equity financing of Deodar assets. We expect the company to pay a marginal dividend of Rs 2.0/share in 2025 and 2026. The dividend is expected to resume in 2027, at Rs14.5/share.

Valuation: After incorporating a discount of 30% on listed portfolio companies, we have a target price of Rs323/share for the company, suggesting a return of 41%.

Key Risks: Key risks to our thesis include (1) an Increase in interest rates, (2) a Revision in PPAs of Thermal assets, (3) a higher-than-expected devaluation, (4) a Significant drop in international Urea price, and (5) a Change in the regulatory framework.

The company announced the completion of the Deodar Deal on May 23, 2025. The enterprise value of the transaction (i.e., 10,617 towers) is US$562.7mn, including debt of US$375mn and Equity of US$187.7mn.

As part of the arrangement with PMCL, Engro Corp Limited (ECL) provided a guarantee for the repayment of DPL’s liabilities amounting to Rs 98 bn. During the period, DPL repaid Rs 52 bn (reflected in 1H2025 cashflow), reducing the outstanding liability. Consequently, ECL’s guarantee exposure as at June 30, 2025 stands at Rs47bn.

On the other side, the company is raising long-term debt for up to 12 years, including a 4-year grace period, at a 6MKIBOR + 2.5% for the first four years and 1.3% thereafter. Assuming repayment over 10 years, the annual repayment comes around Rs10bn, much lower than our estimated Year 3 and 4 cash earnings (profit plus depreciation) of Rs11bn and Rs12bn, respectively for Deodar assets. This suggests the company can easily repay debt over the required tenor.

The equity component of the deal is around Rs 52 bn, and as per our channel checks, the company has already paid Rs 16-18 bn through its own cash generation, while the remaining payment is staggered till Dec 2026 in installments.

In 2025 and 2026, Engro Corp (a subsidiary of ENGROH) can receive dividend income of PKR 41 billion combined, besides additional positive cash earnings from deodar assets in 2025 and 2026, amounting to Rs 9 billion and Rs 10 billion (assuming repayment will start from 2029). This suggests the company will have enough cash available from existing dividend streams and cash profit of tower assets to meet the equity requirement.

Earnings-wise, EPTL will remain the largest contributor to ENGROH’s consolidated earnings, with its earnings continuing to increase due to the higher debt repayment component in the tariff. However, on a cash basis, EFERT will remain the larger contributor.

Deodar has a total tower count of 10,617. According to our channel checks, the company has approximately 3,000 towers connected with other MNOs as well. This results in an overall tenancy ratio of 1.25-1.3x for the deodar towers.

As per our channel checks, each tenant/tower will contribute Rs265,000 per tower every month, with 70% of the price escalation linked to PKR devaluation and 30% related to domestic inflation.

The company has also signed a 12-year contract with Pakistan Mobile Telecommunications (PMCL). This will ensure continuity of the anchor tenant on the overall network of deodar assets for 12 years.

Assuming Rs265,000 revenue and gross profit margins of 45% (lower than 48% reported by Enfrashare), the company can post a profit of Rs 1.0bn in 2025. To note, revenues are included for 7 months as the amalgamation is effective from Jun 03, 2025.

In the future, we expect this profitability to increase to Rs2.0bn and Rs3.1bn in 2026 and 2027.

Besides deodar, the existing tower network of ENGROH, under the umbrella of Enfrashare, also turned profitable in 1Q2025. The primary reason for this turnaround is the lower finance cost resulting from the business’s higher debt-to-equity ratio, which benefits from a falling interest rate environment.

We expect Engro Connect (Deodar+Enfrashare) to contribute Rs5.2bn and Rs6.8bn in 2026 and 2027, respectively. This translates into per share contributions of Rs 4.3 and Rs 5.7/sh.