Earnings Report /
Pakistan

Engro Fertilizers: 3QCY22 Review - Lower-than-expected margins lead to earnings miss

  • EFERT posted consolidated EPS of PKR3.13 (DPS PKR3.0), lower than our estimate of PKR3.61, owing to lower GM

  • GM dipped by c.3ppt QoQ to 27.3% (IMS estimate of 31.8%), due to higher production from Base plant, in our view

  • We estimate a healthy 12M DY of 20% and maintain our Buy stance (TP of PKR92) on the scrip amid healthy sales and prices

Intermarket Securities
12 October 2022

EFERT posted consolidated net profit of PKR4.2bn for 3QCY22 (EPS: PKR3.13), down from a NPAT of PKR4.4bn (EPS: PKR3.30) in 3QCY21. The result came in lower than our expected EPS of PKR3.61, largely owed to lower than expected gross margins. EFERT paid interim cash dividend of PKR3.0/sh as compared to our assumption of PKR3.5/sh.

Key highlights of 3QCY22:

  • Despite a massive decline in Urea/DAP offtake by 27%/50% YoY, net sales have reduced by a mere 4%/7% YoY/QoQ to PKR35.7bn. This is due to considerable increase in DAP prices and Urea prices, significantly offsetting the volumetric decline. 

  • Gross margin dipped by c.3.2ppt QoQ, but increased by 1.6ppt YoY to 27.3%, lower than our estimate of 31.8%, due to higher production from base plant amid the unscheduled shut down of Enven plant for around 20 days. However, base plant was operational at PP12 gas rates that led to the attrition in margins, in our view. 

  • Among other line items: i) finance costs increased by 37% YoY to PKR582mn amid higher interest rates and short term borrowings, ii) other income reduced to PKR205mn due to a sharp decline in short term investments, and iii) selling and distribution costs rose to PKR2.2bn despite the decline in sales volumes. We await detailed financials for more clarity. Other expenses have reduced due to lower exchange losses, in our view.

  • The effective tax rate clocked in at 32.8% versus 30.4% in SPLY.  This is likely due to the imposition of 4% super tax. 

Looking ahead, strong Urea sales coupled with higher Urea and DAP prices will likely keep earnings and dividend healthy in the coming quarters. We estimate a healthy 12month DY of 20% and maintain our Buy stance (TP of PKR92) on the scrip.