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Fauji Fertilizer: 4QCY19 review: Last-minute off-take supports earnings

    Intermarket Securities
    30 January 2020

    Fauji Fertilizer Company Ltd (FFC) has posted 4QCY19 NPAT of PKR4.6bn (EPS: PKR3.65), down 21% yoy, taking CY19 profitability to PKR17.1bn (EPS: PKR13.45), up 19% yoy. The 4Q result was slightly below our expectation of PKR5.1bn (EPS: PKR3.98) mainly owing to (i) higher-than-expected other expenses, and (ii) slightly lower gross margins. The result accompanied interim cash dividend of PKR3.25/sh, taking total CY19 payout to PKR10.8/sh. We are Neutral on the stock with a TP of PKR102.

    4QCY19 Key result highlights: 

    • Net revenues declined by 7% yoy to PKR32.8bn in 4QCY19 amid lower offtake of Urea and DAP, which declined by 3% yoy and 56% yoy respectively. The decline in DAP sales is mainly on account of higher prices of DAP and dilution in market share owing to increased sales by other manufacturers. Note that FFBL’s market share has declined to 13% in DAP segment, down 6ppt yoy.
    • Gross margins remained almost constant at 28% same as in 3Q, as improved urea prices have helped the company to offset gas tariff hike (feed/fuel up by 32%/35%yoy).
    • Finance cost elevated to PKR807mn, up 78% yoy, due to increased borrowing (inventory buildup earlier in the quarter) and higher interest rates. Note that the increase in borrowings is despite pile-up of GIDC accruals.
    • Other expenses have also increased significantly to PKR1.0bn, up 55%/2.1x yoy/qoq basis. We await more clarity on this post availability of the annual report.
    • Among other line items: (i) Distribution expenses increased by 16% yoy on account of axle load and higher transportation costs, and (ii) effective tax rate was recorded at 28% in 4Q as compared to 26% in the same period last year.