REP-091 ENGRO CORPORATION (ENGRO)

Recent MSCI reclassification of ENGRO from mid cap to small cap has resulted in a sell off due to possible rebalancing. We believe this has led the price to an attractive range from a valua-tion standpoint as core SOTP based value of ENGRO is Rs243.55/share excluding cash of Rs116/share which if deployed towards import substitution projects i.e. naphtha cracker and other energy related projects would boost the valuation going forward. We have a BUY stance on ENGRO with SOTP based target price of Rs358/share providing 31% upside from last day closing price of Rs273

ENGRO posted 9MCY17 consolidated profit after tax of Rs 11.56bn (EPS: Rs13.09) up by 2.2% YoY as compared to same period last year. ENGRO has also announced a dividend of Rs7/share which is in addition to an interim dividend of Rs12/share already paid.

EFERT is likely to be the major contributor to CY17 earnings as GOP’s subsidy on fertilizer and export of excess inventory tend favorable support to earnings.

EPCL earnings improved due to higher PVC and Ethylene margins avg. USD375/ton in 9MCY17 (avg. USD271/ton in 9MCY16) and improved domestic PVC demand. However vola-tile oil prices and decline in demand of PVC poses risk on EPCL bottom-line

Sindh Engro Coal Mining Project and Thar Power Plant will start contributing from June 2019 to the bottom line of ENGRO. Moreover Engro Powergen through its subsidiary Kolachi Port-gen is in the process of setting up 450MW RLNG based power plant at Port Qasim.

Engro Elengy Terminal operating at 100% utilization level since January 2017 (600 mmscfd) after SSGC started utilizing additional 200 mmscfd capacity of terminal. As per media reports ENGRO is also planning to setup 2nd LNG terminal.

November 15,2017

KATS Symbol ENGRO Reuters Symbol EGCH.KA Target Price Rs358 Current Market Price Rs273.17 Outstanding Shares (mn) 523.78 Free Float (mn) 288.08 Market Cap (mn Rs) 143,081

Price Performance Against KSE100 Index

SOTP Valuation

Research Department

111-555-ASL (275)

research@abbasisecurities.com

Disclaimer: This document is prepared for information purposes only. The information and data on which this report is based are obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. This document does not take account of the investment and trading objectives, financial situation and particular needs of clients, who should seek further professional advice or rely upon their own judgment and acumen before making any investment / trading decision

ENGRO CORPORATION GROUP STRUCTURE

Source: Co Financials

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KSE-100 Index ENGRO

Recent Price Decline and Improving Fundamentals Provide Attractive Valuation-BUY

Engro Corp SOTP Valuation Rs

EPCL* 17.14

EFOODS* 34.71

EFERT* 69.31

Eximp 9.60

PowerGen* 77.74

Vopak 0.86

Elengy Terminal PVt Limited 34.20

After Discount 30%* 243.55

less: corporate debt (Sept-17) (1.90)

Engro Corp Standalone (including cash) 116.40

Target Price 358.06

Source: AS Research

REP-091 Highlights of 9MCY17 Result

ENGRO posted 9MCY17 consolidated profit after tax of Rs6.8bn (EPS: Rs13.09) up by 2.2% YoY as compared to same period last. The muted growth is due to higher effective tax of 41%. The major reason for hike in effective tax rate was retrospective provisioning of Super Tax in 2QCY17 amounting to Rs2.1bn on CY16 profit which included one-time capital gains resulting from divestment of EFOODS and EFERT partial stake.

ENGRO has challenged the levy in the High Court of Sindh and has been granted a stay in this respect. Based on the opinion of its legal advisor, ENGRO believes that there is a reasonable case in their favor. However, based on prudence, the Company has made provision for Super Tax

Company witnessed 20% YoY decline in revenue due to non-consolidation of EFOODS revenue this year. Excluding EFOODS, ENGRO revenue grew by 18% YoY where major growth came from fertilizer and polymer business where revenue growth was 21% & 23% respectively. Higher urea off take on the back of continued GOP subsidy and PVC demand uptick can be regarded as core reasons for growth in these businesses.

Other income increased by 57% because of higher value of subsidy receipt from fertilizers business and return on short term investments

In the 3QCY17 ENGRO also announced the dividend of Rs7/share. This is an addition to the interim dividend of Rs12/share already paid

Strong fertilizer performance: a major driver of profitability

Due to continued support from the Govt. in the form of subsidy and beginning of Rabi Season, we expect urea demand to remain strong. At the end of Sep. 2017 industry urea inventory stood at 732K tons. We expect it to decline ~530K tons by the end of CY17 (1,038K tons in CY16).

EFERT is expected to post CY17 EPS of Rs7.67 which will be 13% higher than last year. The im-provement in earnings is largely due to higher off take of urea (1.8mn tons expected in CY17 as compared to 1.6mn tons in CY16) because of govt. subsidy scheme and export of excess urea inventory during the period under review at better realized price. On the international pricing front, after a bullish run of urea prices during the 3Q, prices are expected to stabilize during 4Q

However fertilizers industry had already exported the permissible quota (i.e. 600k) allowed by the federal government by Oct-17. Our sources in the industry told us that manufacturers have no intention of approaching government for extension in permissible export quota as year end inventory levels will be under manageable position.

November 15,2017

ENGRO Corporation Consolidated

Industry Year End Inventory Level

of Urea (000 tons)

Research Department

111-555-ASL (275)

research@abbasisecurities.com

Disclaimer: This document is prepared for information purposes only. The information and data on which this report is based are obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. This document does not take account of the investment and trading objectives, financial situation and particular needs of clients, who should seek further professional advice or rely upon their own judgment and acumen before making any investment / trading decision

Rs'000 (except where indicated) 9MCY17 9MCY16 Q3CY17 Q2CY17 Q1CY17 Q4CY16Net sales 86,353,639 108,567,020 34,189,934 29,664,369 22,499,336 48,640,648Cost of sales (62,483,033) (81,501,983) (24,916,999) (21,778,991) (15,787,043) (39,862,872)Gross profit 23,870,606 27,065,037 9,272,935 7,885,378 6,712,293 8,777,776Selling & distribution expenses (5,295,825) (7,508,528) (1,832,009) (1,982,928) (1,480,888) (4,544,230)Administrative Expense (2,644,726) (3,052,982) (997,886) (914,409) (732,431) (552,830)Other operating income 7,630,991 4,843,846 2,013,117 3,224,888 2,392,986 63,994,336Other operating expenses (1,299,827) (1,271,624) (543,137) (467,467) (289,223) (1,076,939)Finance cost (3,627,033) (4,492,037) (1,047,192) (1,264,324) (1,315,517) (1,545,874)Share from joint venture 1,127,081 953,736 445,813 230,904 450,364 319,761PBT 19,761,267 16,537,448 7,311,641 6,712,042 5,737,584 65,372,000Taxation (8,193,293) (5,215,327) (2,383,332) (4,291,372) (1,518,589) (3,095,992)PAT 11,567,974 11,322,121 4,928,309 2,420,670 4,218,995 62,276,008Non Controlling Interest 4,714,154 2,739,288 1,789,508 1,546,620 1,378,026 1,751,601Profit att to shareholders 6,853,820 8,582,833 3,138,801 874,050 2,840,969 60,524,407EPS (Rs) 13.09 16.39 5.99 1.67 5.42 115.55Gross profit margin 27.64% 24.93% 27.12% 26.58% 29.83% 18.05%Selling & Distribution Expenses 6.13% 6.92% 5.36% 6.68% 6.58% 9.34%Admin Expense 3.06% 2.81% 2.92% 3.08% 3.26% 1.14%Effective tax rate 41.46% 31.54% 32.60% 63.94% 26.47% 4.74%Net Profit Margins 13.40% 10.43% 14.41% 8.16% 18.75% 128.03%Source: Company Financials, AS Research

ENGRO CORPORATION 9MCY17 Result (Consolidated)

Source: NFDC, AS Research

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REP-091 PVC margins stand at USD343/tons

Higher PVC and Ethylene margins avg. USD375/ton in 9MCY17 (avg. USD271/ton in 9MCY16) and improved domestic PVC demand resulted in earnings turnaround

Current margins stand at USD343/ton, continuation of these margins can result in 4QCY17 EPS of Rs0.51 which will take full year estimated earnings to Rs3.44/share

EPCL is in the process of debottlenecking of its PVC plant which is excepted to commence op-erations from Jan-2018, after debottlenecking PVC capacity will increase by 12% from 44.5K tons to 49.75K tons. We estimate this will result in an incremental earning of Rs0.20-0.25/share at current PVC/Ethylene core delta

Power Projects to contribute form CY19

Sindh Engro coal mining project and Thar power plant is expected to become operational in June 2019. We estimate the projects to add Rs1.46/share and Rs10.54/share respectively to the earning of ENGRO

Engro Powergen through its subsidiary (Kolachi Portgen Pvt Ltd) has applied for the tariff ap-proval to setup 450MW LNG based power plant at port Qasim with an estimated cost of USD392mn (75:25 Debt to Equity). The plant will commence production after 27months post financial close

The CPP (capacity payment) portion of the tariff includes ROE component amounting to Rs0.653/Kwh which is indexed to adjustment in US$/PKR on a yearly basis. Based on tariff peti-tion filed, we estimate that this project to add Rs2.6bn (EPS Rs5.05/share). However, we wait for further clarity before incorporating this in our valuation model

Full utilization of LNG Terminal while the second terminal is on the card

From January 2017 SSGC started utilizing additional 200 mmscfd capacity of LNG regasification capacity. In 9MCY17 company handled 52 cargos as compared to 32 cargos in the same period last year. As reported in media ENGRO is going to setup another LNG terminal which is ex-pected to become operational in 2019

We have a BUY stance on ENGRO with SOTP based target price of Rs358/- providing 31% up-side from the last day closing price of Rs.273.17/-

November 15,2017

PVC/Ethylene Core Delta (USD)

Research Department

111-555-ASL (275)

research@abbasisecurities.com

Disclaimer: This document is prepared for information purposes only. The information and data on which this report is based are obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. This document does not take account of the investment and trading objectives, financial situation and particular needs of clients, who should seek further professional advice or rely upon their own judgment and acumen before making any investment / trading decision

SOTP Valuation

Engro Corp SOTP Share Holding Valuation Rs

EPCL* 56% 17.14

EFOODS* 40% 34.71

EFERT* 56% 69.31

Eximp 100% 9.60

PowerGen* 100% 77.74

Vopak 50% 0.86

Elengy Terminal PVt Limited 80% 34.20

After Discount 30%* 243.55

less: corporate debt (Sept-17) (1.90)

Engro Corp Standalone (including cash) 116.40

Target Price 358.06

Source: AS Research

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Source: Co Financials, Reuters

Disclaimer: This document is prepared for information purposes only. The information and data on which this report is based are obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. This document does not take account of the investment and trading objectives, financial situation and particular needs of clients, who should seek further professional advice or rely upon their own judgment and acumen before making any investment / trading decision

REP-091

Disclaimer

Disclaimer: This document is prepared for information purposes only. The information and data on which this report is based are

obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. This document

does not take account of the investment and trading objectives, financial situation and particular needs of clients, who should

seek further professional advice or rely upon their own judgment and acumen before making any investment / trading decision.

Analyst Certification

The author (s) of this report hereby certifies(y) that this report accurately reflects his/their own independent opinions and views

as of the time this report went into publication and that no part of his/their compensation was, is or will be affected by the rec-

ommendation(s) in this report. The research analyst or any of his/their close relatives do not have a financial interest in the securi-

ties of the subject company aggregating more than 1% of the value of the company and the research analyst or their close rela-

tives have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the

past 12 months. The Research analyst or his/their close relatives have not traded in the subject security in the past 7 days and will

not trade for 5 days post publication of the report.

Valuation Methodology

To arrive at period end target price, Abbasi Securities uses different valuation methodologies:

· Comparable Method ( P/E, P/B etc.)

· Discounted Cash flow Method

·Equity and Asset based valuation

Rating

BUY Total return more than 20% from last closing of market price

HOLD Total return is in between 10% and 20% from last closing of market price

REDUCE Total return is less than 10% from last closing market price