ENGRO: POST-BoD ANALYSIS

Posted on 01.23.07 by Tanveer Sultan @ 4:45 pm    

BOARD MEETING:
The Board of Directors (BoD) of Engro Chemicals Limited (Engro) was scheduled for Saturday 20 Jan. 2007 to approve the 2006 full-year results. However the results were announced on 22 Jan. 2007 at 10:00 am. Circumspect though it may seem, bear with me.

2005 DISCLOSURES:Profit after Tax (PAT): Rs. 2, 320 million
Earnings per Share (EPS): Rs. 13.79
Payout: Total cash dividend of Rs. 6

2006 EXPECTATIONS:
PAT: Rs. 2, 350 million, with expected growth of 1%
EPS: Rs. 13.94
Payout: Rs. 4 to 5

ANNOUNCED RESULTS:
Profit: Before taxation = Rs. 3, 444.656 million; PAT = Rs. 2, 547.3 million
EPS: Rs. 15.47
Payout: The company has announced final cash dividend of 30% i.e. Rs. 3 each share while the interim dividend was 60% i.e. Rs. 6 each. This makes the total of 90% i.e. Rs. 9 each share for the year 2006.

ANALYSIS:
The results announced are positive. The company has actually shown a compounded annual growth of 9.8%. The company has posted an increase of Rs. 227.33 million in profits. In sprite of lower sales for NPK and phosphates along with lower than expected urea sales during the year, the company netted well. It may be attributed to an increase in DAP sales and a good support from Engro’s wholly-owned subsidiary companies, such as the well-to-do Engro Foods. Engro has also announced a handsome dividend of Rs. 9 per share in aggregate; the final dividend being 30% or Rs. 3 per share which was Rs. 6 for the same period in 2005 with the expected dividend at Rs. 4-5.

I say, though the results undoubtedly show handsome figures that portray the strength of the company well but, given to upcoming expansions of its wholly-owned subs Engro Asachi, Engro Innovative and Engro Foods, the company might see a slowdown in earnings.

Engro has also won gas from Qadirpur gas field at Rs. 101 million premium for 100 cubic feet of gas daily. It has also signed a MoU with a Chinese company for establishing a new urea plant at Dahorhi. These upcoming projects might put pressure on bottom-line profits with an increase in expenses, primarily financial charges.

Right now the company is traded at a Price-to-Earnings (P/E) ratio of 12 against the market P/E of 9.2 showing a premium of 2% in investment now. The GoP is allowing import of DAP in an attempt to curtail manipulating prices.

With an impending increase is expenses and competition in the above stated substance, one should go for profit taking and not hold for dividends in the scrip. This will give an investor a chance to wait and invest in Engro when the prices have dipped. Most equity firms state Engro is at fair value. Bah, what do they know.