EFERT posted consolidated 1QCY21 NPAT of PKR5.74bn (EPS: PKR4.30), up 9x yoy. The result was significantly above our expected EPS of PKR2.91. The deviation primarily stemmed from (i) higher gross margins due to higher Urea prices than expected, and (iii) elevated sales due to offtake of other fertilizer products. EFERT also announced an interim cash dividend of PKR4.0/sh – above our expectations of PKR2.75/sh.
1QCY21 key highlights:
EFERT reported a c.2x yoy increase in sales to PKR29.4bn in 1Q, due to significantly higher offtake (this was majorly due to low base effect, where in 1QCY20 EFERT sold less Urea amid price disparity with the rest of the industry. EFERT’s Urea and DAP sales were up by 3.5x/1.0x yoy to 522k and 62k tons, resulting in a 25ppt and 5ppt yoy decline in market share to c.42% and c.19%, respectively, in 1QCY21.
ross margins surged by 5.6ppt yoy to 39% in 4Q, as compared with our expectation of 38%. This was led by an increase in Urea, DAP and other fertilizer product prices (inventory of DAP led to inventory gains amid rising prices).
Distribution and other expenses increased by 73% and 3.5x yoy to PKR1.82bn and PKR672mn respectively in 1Q. Higher offtake was the key reason behind the increase in distribution expenses, in our view. However, other expenses increased in line with profitability.
Among other line items (i) Admin expenses surged by 15% yoy to PKR412mn, (ii) finance costs decreased by 78% yoy to PKR269mn because of lower borrowings, and (iv) effective tax rate of 34% in 1Q as compared with 49% in 1QCY20.
We have a Buy rating on the scrip with a December 2021 TP of PKR75/sh.
Analyst briefing takeaways:
During 1QCY21, EFERT sold highest ever Urea of 582k tons, up 9x yoy; this was mainly because of higher demand in the quarter and less availability of Urea by FFBL. However, EFERT’s production of Urea clocked in at 523k tons, down 8%yoy, due to a turnaround at EFERT’s plant.
The company believe that DAP offtake is likely to be on the higher side in CY21 due to better farm economics and DAP prices are also likely to be steady in the near term amid better global demand.
During CY21td, EFERT has obtained TERF facility to improve the efficiencies of the base plant and it is undertaking BMR on it to increase overall production. The upgradation of the plant is expected to be completed by the end of CY21.
On the discontinuation of concessionary gas, the management said that they are in continuous discussions with the gas utility (SNGPL) to convince them on the timeline mentioned in the contract and the duration the gas ought to be provided. The ECC has also directed SNGPL to supply uninterrupted gas to new fertilizer plants for maximum 10 years from the day of commencement of operations of the new plant (or in number of days). If the situation is not settled until June 2021, then EFERT’s earnings will be negatively impacted by PKR3.5bn based on present level of gas prices.
The minimum sales tax for the dealers has been reduced to 0.25% from 0.75% and 0.70% previously, and the company has also issued formal notification to unregistered dealers urging them to register. So far 59% of the dealers has been registered.
Management also pointed out that local Urea prices are presently selling at c.46% discount to international prices. Local Urea bag price is hovering at PKR1,731/bag vs international prices of PKR3,226/bag. The industry has completely passed on the benefit of lower prices to the farmers; equivalent to c.PKR700bn from CY10-21, as compared with PKR307bn, which was provided by the government as gas subsidy during the same period.