Earnings Report /

Engro Fertilizers: 2QCY22 Review: Negative earnings from supertax in 2Q

  • EFERT posted consolidated net loss of PKR98mn for 2QCY22 (LPS: PKR0.07), for the first time since CY13

  • The result is significantly lower than our expected EPS of PKR1.27, largely owed to significantly large taxation charge

  • Going forward, strong Urea sales and prices are likely to keep earnings and payout healthy in the coming quarters

Intermarket Securities
28 July 2022

EFERT posted consolidated net loss of PKR98mn for 2QCY22 (LPS: PKR0.07), for the first time since CY13, down from a NPAT of PKR4.8bn (EPS: PKR3.57) last year. This is against our expected EPS of PKR1.27, largely owed to significantly large taxation charge due to budgetary measures and higher other expenses. EFERT skipped out on dividend payout this quarter due to lack of positive earnings.  The company also conducted an analyst briefing post-result announcement

Key highlights of 2QCY22:

  • Net Sales increased to PKR38.3bn versus our expected topline of PKR36.0bn. Higher Urea and DAP prices, along with a decent increase in DAP offtake are the major reasons for the surge in revenues.

  • Gross margin slid by a sharp c.7.5ppt YoY to 30.5%, slightly higher than our estimate of 29.5%, due to discontinuation of concessionary gas at the Enven plant. Higher-than-expected GM is majorly due to elevated trading margins booked on DAP and other fertilizer products.

  • The effective tax rate clocked in at 101% due to the imposition of supertax. According to management, the company booked PKR3bn on account of CY21 PBT, PKR596mn on 1HCY22 PBT (4% of PBT) and PKR1.6bn due to deferred tax adjustments.

  • Among other line items i) finance costs remained flat compared to the previous year ii) other income increased to PKR583mn due to greater short term investments and policy rate, iii) selling and distribution costs decreased due to lower fertilizer offtake and iv) higher other expenses due to exchange losses to the tune of PKR700-750mn.

Analyst Briefing Takeaways:

  • During 1HCY22, Industry Urea sales witnessed growth of 12% YoY to 3.2mn tons, while that of DAP declined by 10% YoY. The rise in Urea sales is attributed to i) substitution of DAP for Urea as DAP prices have surged to record high levels, ii) better farm economics and, iii) lack of nitrogen in Pakistan’s soil.

  • The management expects record Urea offtake of 6.6mn tons in CY22 for the aforementioned factors to meet growing local and also due to potentially continuing smuggling of Urea. 

  • With regards to the recent PKR350/bag price hike, the management stated that the rise in price was due to i) input-output tax adjustment (now included in cost following the budget), ii) sharp rise in finance costs and, iii) increase in petroleum policy gas rate on account of sharp PKR devaluation. 

  • The expected increase in gas prices will be implemented from Jul’22 and has not been accounted for in the recent price hike. Although the sector should be able to pass on the increase in price to consumers, uncertainty prevails to the extent of the cost pass on. If allowed, Urea price is likely to increase by another PKR350/bag, in our view.

  • The company will continue with BMR on the base plant to the tune of USD50mn, regardless of the status of discussions with the government (with regards to gas allocation and rate). The base plant is expected to undergo a turnaround (2months) near the end of 3Q.

  • With regards to lack of cash payout during the quarter, the company will restart payouts from 3Q, as earnings are likely to normalize post one-off high supertax charge.

Going forward, strong Urea sales and higher DAP prices is likely to keep earnings healthy in the coming quarters. Following the result, EFERT’s stock price plunged close to its lower circuit. We estimate a healthy 12month DY of 13% and maintain our Buy stance (TP of PKR92) on the scrip.