Equity Analysis /
Pakistan

Engro Fertilizers: 2Q 19: Higher tax drags 2Q results

    Intermarket Securities
    8 August 2019

    Engro Fertilizer Ltd (EFERT) has posted 2QCY19 NPAT of PKR3.2bn (EPS: PKR2.38), down 3% yoy. This brings 1HCY19 profits to PKR7.2bn (EPS: PKR5.38), flattish yoy. On PBT basis, profitability jumped by 26%yoy to PKR6.1bn in 2Q. This is led by (i) expansion in GM’s amid improved urea retention prices, and (ii) 2.8x yoy increase in other income. However, the realization of 48% effective tax rate and 3.4x yoy increase in finance cost dragged 2Q profits. Alongside the result, EFERT announced an interim cash dividend of PKR5.0/sh,

    Key highlights in 2QCY19:

    • Net sales grew by 18% yoy to PKR27.0bn despite lower Urea/Dap offtake of 8%/14% yoy. This is mainly on account of (i) higher urea/DAP prices (up 23%/11% yoy), and (ii) increased sales of specialty fertilizers.
    • The GMs improved by c. 3ppt yoy to 32% in 2QCY19 as against 29% in 2QCY18, owing to an increase in domestic retention prices and lower DAP sales. This was partially offset by increased gas pricing from PP12. 
    • EFERT booked an effective tax rate of 48% as compared to 32% in the same period last year. This is potentially owing to a partial reversal of the deferred tax gain booked in CY18 on account of revised corporate tax rates. To highlight, the corporate tax rate is maintained at 29% in Federal Budget FY20 as compared to the earlier plan of reducing it to 25% by FY23. 
    • Among other line items: (i) Other income increased substantially to PKR1.4bn (up by 2.8x yoy), and (ii) Finance cost surged by 3.4x yoy to PKR1.2bn owing to higher DR and short term borrowing. 

    We have a Buy stance on EFERT which offers an attractive dividend yield of 17%.

    Risks: (i) Unfavorable GIDC settlement, (ii) surplus urea inventory and (iii) delay in subsidy collection.