Engro Earnings and Dividend Revised Down; Buy Stance Maintained

Staff Report:

Topline Pakistan Research has revised down its earnings estimates for Engro Holdings (ENGROH) for 2025 and 2026 by 23% and 27% to Rs17.5/share and Rs20/share, respectively. The downward adjustment in earnings outlook is due to a revision in Engro Fertilizers’ earnings and the incorporation of Engro Vopak Terminal’s expiry from mid-2026.

The earnings contribution from the recently announced Engro Connect (Tower Company) deal has not yet been incorporated, as the transaction is still pending. However, based on our estimates, Engro Connect will achieve breakeven in Year 1 of its operations and post earnings of Rs1.6bn and Rs5.3bn in Year 2 and Year 3, respectively. This translates into a per-share earnings contribution of Rs1.3 and Rs4.4, respectively. The business is expected to turn profitable due to declining interest expenses, driven by reducing debt levels and stronger cash flows (EBITDA 60%).

Our dividend outlook has been revised down. Previously, we anticipated that the Rs25bn cash inflow from the thermal asset sale would be distributed as a one-off dividend in 2025. However, following the acquisition of Pakistan Mobile Communications Limited (PMCL) Tower Business, we now expect these cash flows to be utilized for financing the equity portion of the deal.

The total deal size is US$562.7mn, of which US$375mn is debt guaranteed by ENGROH, while the remaining US$187.7mn will be paid to PMCL. We assume an equity component of US$187.7mn, and the company currently holds a cash balance (net of dividends payable) of Rs30bn (US$106mn) as of September 2024. With expected proceeds of Rs27.4bn from the thermal asset sale and Engro Eximp Agriproducts, the total cash available to the company would rise to Rs57bn (US$204mn), comfortably covering the required equity investment for the tower deal.

Based on the above and the likely upfront investment requirement in Engro Vopak (if renewed), we revise down our dividend estimates for ENGROH from Rs33/20 per share to Rs11.5/14.0 per share in 2025/2026. If the thermal deal is further delayed and does not materialize on time, an additional cut in the dividend payout cannot be ruled out.

Earnings expectations for Engro Fertilizers (EFERT) have also been revised down by 9% in 2025, from Rs26.6 per share to Rs24.4 per share, after incorporating an average discount of Rs70-80 per bag on Urea throughout the year.

We maintain our BUY stance on ENGROH, as the company is currently trading at Rs188/share compared to its Sum of the Parts (SOTP) value of Rs282, representing a 33% discount. The biggest contributor to the SOTP-based target price (TP) is Engro Fertilizers (48%), followed by Cash and Cash Equivalents (18%). Other businesses, including Engro Elengy, FrieslandCampina, and Engro Polymer, contribute within the 5-9% range.

In cash and cash equivalents, we have included proceeds expected from Thermal Assets and Agriproducts, totaling Rs27.4bn (net of tax). We have not yet incorporated the Engro Tower deal in the SOTP as the transaction is still pending. Once finalized, a major portion of cash will be replaced by the estimated tower business value of Rs45-55/share (based on different valuation metrics).

Key risks to our investment thesis include higher-than-expected delays in the divestment of a majority stake in Thermal Energy Assets, a significant drop in international Urea prices, and prolonged delays in construction activities.