Engro Eyes Massive 57% Increase: Rs490/Share in Sight by Year-End

According to the most recent report from Topline Securities, the share price of Engro Corporation (PSX: ENGRO) is predicted to rise by 57% to Rs490 by the end of December 2024, primarily due to the expectation of a potential special dividend, the implementation of WACOG (weighted average cost of gas), the expansion of the Enfrashare (tower) business, and the anticipated rebound in construction activities.

The report states that the main reasons why we like ENGRO are: (1) the possibility of a special dividend through the sale of its Thermal Energy portfolio; (2) the likelihood of EFERT benefiting from the implementation of Weighted Average Cost of Gas (WACOG); (3) the expansion of Enfrashare (Tower) business along with falling interest rates to enhance profitability; and (4) the predicted recovery of construction activities resulting in an increase in EPCL earnings.

To lessen its exposure to thermal energy assets, such as Engro Powergen Qadirpur (EPQL), Engro Powergen Thar Limited (EPTL), and Sindh Engro Coal Mining Company (SECMC), one-time special dividend ENGRO has started talks with Liberty Power.

According to the article, "ENGRO plans to sell the majority of its stake in thermal assets for a cash consideration of approximately Rs30–40 billion, based on our channel checks."

According to Topline's forecasts, net cash inflows after tax would be Rs26 billion, or Rs48 per share.

The broking house stated that they expect ENGRO to announce a one-time special dividend of Rs45 per share in 2025, increasing the total dividend to Rs91 per share for the year, assuming no big projects and a recent history of distributing all extra income as dividend.

WACOG will help EFERT

The organization that stands to gain the most from the application of the WACOG mechanism is EFERT.

Under Petroleum Policy 2012 (PP-12), EFERT is currently charged $5.6 per mmbtu (Rs1,600 per mmbtu) for the feed gas at its base plant, which accounts for around 40% of its total urea production. In comparison, other fertilizer players charge $2 per mmbtu (Rs580 per mmbtu).

EFERT is anticipated to see a favorable impact on its bottom line of Rs6 per share since it already procures around 40% of the entire gas required in feed gas at higher rates, after the hike in Urea price following WACOG implementation which is in line with other competitors.

Tower expansion & expected decline in interest rates to revive Enfrashare’s profitability:

The business has progressed well in the last 5-years, with its portfolio of 4,000 towers by the end of 2023.

Going forward, ENGRO plans to extend its tower network by addition of around 750 towers every year, aiming to reach around 8,000+ towers by the end of 2028 with a tenancy ratio of 1.2-1.25x.

Due to record high interest rates, Enfrashare is expected to post a loss of Rs1.7bn in 2023.

However, with the expectation of a decline in average 6-month KIBOR from 21.6% in 2023 to 18.7% in 2024 and 17% in 2025, the segment's losses are expected to decrease to Rs0.1bn in 2024, turning into profits of Rs1bn in 2025 and Rs3.6bn in 2026.

A rise in sales of PVC

Topline Securities anticipates a resurgence in construction activity in 2024, which will boost demand for PVC as financing rates decrease.

According to the report, EPCL expects its PVC sales to rise at a 5-Year (2022–2026) CAGR of 5% to 285k tons.

PVC can currently produce 295K tons of product annually.

It went on, "Yet, based on our conversation with the management, the site can raise production to 400K tons by committing to optimal capex."It is important to note that risks to this view include lower than planned fall in interest rates, significant drop in worldwide urea price, and larger than expected delays in concluding the disposal of majority ownership in Thermal Energy Assets and WACOG implementation.