Rally of 368% in Egypt Fertilizer Maker Running Out of Steam

(Bloomberg) -- The rally that powered the shares of Egypt’s biggest producer of fertilizers to a more than fourfold surge since January last year may finally be running out of steam.

Abou Kir Fertilizers & Chemical Industries has gained as additional local output meant that the company can export more at a time when Egypt has floated its currency. The shares traded at an estimated price-to-earnings ratio of about 17, compared with about 12 for Egypt’s main index as well as for chemical companies in emerging markets.

Getting paid in dollars after the Alexandria-based company expanded abroad bolstered revenue and whetted appetite for the shares. Its market value has surged to 41 billion pounds ($2.3 billion) and revenue over the past year grew at the fastest pace among global peers, according to data compiled by Bloomberg.

Speculation that the stock may be included in global emerging market indexes further fueled the rally. After reaching a record 35.78 pounds in February, the stock has fallen 10 percent with few catalysts in sight, according to some analysts.

Easing urea prices abroad and a factory shutdown for maintenance may dent sales this year, further pressuring the stock, analysts said. Abou Kir shares trade 24 percent higher than the average target price set by five analysts surveyed by Bloomberg. Below is a summary of some of their views:

Michel Said, CI Capital, neutral

• “Abou Kir’s results last quarter exceeded analysts’ expectations as urea prices increased globally and the utilization rate rose to 110 percent, enhancing their sales mix”
• “Competitor’s MOPCO’s two new lines -- online as of 2016 -- lowered Abou Kir’s local quota; consequently, the fertilizer’s exports surged to 50 percent of total production compared to 20 percent previously”
• “Part of the share price’s recent rally was the market betting on the stock’s inclusion in the MSCI Small and Mid Cap Index as well as the government unveiling its plan to sell part of its stake in the company, improving the stock’s liquidity”

Ahmed Samy, Prime Securities, sell

• “The price is very overvalued”
• “The Egyptian government represented by the National Investment Bank (NIB), which owns ~25% of Abou Kir’s shares, will sell a portion of its stake in order to increase the free float of the firm, which will pressure the stock”
• Natural gas prices pose a huge risk for Abou Kir “as the Egyptian government is moving to end state monopoly of natural gas market.” This would give the company “more options for sources of gas and maybe better prices, but that would expose Abou Kir to any increases in natural gas price above its current $4.5/mmbtu”
• Higher global urea prices “are mainly what would trigger a rating upgrade”

Marina Makeen, Naeem Holding, reduce

• Higher urea prices, higher exports and expansion plans have already been priced into the stock price
• “We could see urea prices cooling off from the recent highs. With one of Abou Kir’s factories going into maintenance, production volumes could be lower than normal levels”

To contact the reporters on this story: Tamim Elyan in Cairo at telyan@bloomberg.net, Filipe Pacheco in Dubai at fpacheco4@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Angela Cullen, Claudia Maedler

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