Earnings Report /

Engro Fertilizers: 4QCY19 review – Decent earnings, but GIDC removal limits upside

    Intermarket Securities
    17 February 2020

    EFERT posted consolidated 4Q19 NPAT of PKR6.4bn (EPS: PKR4.76), up 23%yoy, taking CY19 NPAT to PKR16.9bn (EPS: 12.64), down 3%yoy. The result was broadly in line with our expected EPS of PKR4.59. The increase in profitability was mainly led by (i) a hike in urea prices (up 12% yoy), (ii) an increase in Urea offtake, and (iii) a decrease in admin costs. The result announcement accompanied a cash dividend of PK2.0/sh against our expectations of PKR1.0/sh, taking total payout for CY19 to PKR13.0/sh.

    4Q19 key result highlights

    • Net sales posted an increase of 9%yoy to PKR43.6bn in 4Q, amid a significant increase in urea offtake in December as dealers anticipated a sharp Urea price increase (ahead of an impending gas tariff hike). To highlight, EFERT’s urea sales increased by 29%yoy. However, the company’s market share depleted by 2ppt amid increased production from LNG based producers.
    • Gross profit margin increased by 5ppt to 33.5% in 4Q, owing to a greater increase in Urea and DAP prices as compared to gas tariff hike for concessionary plants.
    • Among other line items (i) other income rose by 3.6x to PKR699mn, mainly on account of higher interest rates and surge in short term investments, (ii) Admin expenses declined by 53% to PKR361mn; we await detailed accounts to shed more light on such a steep decline in admin expenses.
    • EFERT booked an effective tax rate of 35% as compared to 26% in the same period last year. This is potentially owing to a partial reversal of deferred tax gain booked in CY18 on account of revised corporate tax rates. EFERT has reversed PKR1.6bn of deferred tax in CY19. Moreover, capital gains on the sale of Engro Eximp FZE may have led to a further increase in the effective tax rate.

    The government’s decision to reduce GIDC for Fertilizer producers by 99% will negatively impact EFERT’s CY20 earnings, in our view, as 65%-70% of production comes from the Enven plant, which is operating on concessionary rates. So the decrease in Urea prices will erode the company’s future topline and trim margins. As such, we believe that the issue will limit upside in stock price; hence we maintain our cautious stance on EFERT.