Earnings Report /
Pakistan

Pakistan Fertilizer – 1QCY20 preview: GIDC reduction to have mixed impact

  • We expect cumulative earnings of the IMS Fertilizer cluster to decrease by 30% yoy to PKR6.6bn in 1QCY20.

  • The lockdown amid the Covid-19 pandemic will also affect offtake in the next quarter, leading to another inventory glut.

  • We expect the following 1QCY20f EPS – FFC: PKR3.56/sh, FFBL: PKR-1.43/sh, EFERT: PKR0.45/sh & FATIMA Fert: PKR1.35/sh.

Intermarket Securities
19 April 2020

We expect cumulative earnings of IMS Fertilizer cluster to decrease by 30% yoy to PKR6.6bn in 1QCY20 – mainly led by (i) lower Urea offtake, amid

We expect cumulative earnings of the IMS Fertilizer cluster to decrease by 30% yoy to PKR6.6bn in 1QCY20 – mainly led by (i) lower Urea offtake, amid pre-buying in December and (ii) reduction in Urea prices due to cut in GIDC. 

Urea offtake of 1.02mn tons in 1QCY20 was down 25% yoy, which will keep a check on 1Q profits. Moreover, the lockdown amid the Covid-19 pandemic will also affect offtake in the next quarter, potentially leading to another inventory glut, in our view.

Near-complete removal of GIDC led to the downgrade of earnings of concessionary gas-based producers, as they eventually reduced Urea prices in line with the rest of the industry.

FFC to benefit from higher offtake & prices 

We expect Fauji Fertilizer (FFC) to post 1QCY20 NPAT of PKR4.5bn (EPS: PKR3.56), up 22% yoy, amid (i) 4%yoy increase in urea offtake (market share also rose to 57% vs 41% in 1QCY19), and (ii) delay in passing on of full impact of GIDC removal on feed and fuel gas. Note that overall urea sales in 1QCY20 declined by 25% qoq; whereas FFC sales managed to increase by 4% qoq, increasing its market share. We expect the gross margins to increase by about 8ppt yoy to 37% because of the delay in the decrease of Urea prices after the GIDC cut. Other income is expected to remain elevated (up 27% yoy) mainly owing to hefty cash balance, courtesy pile up of GIDC accruals (not yet paid) and higher dividend income form AKBL. This will more than offset the impact of the increase in borrowing cost amid higher interest rates, in our view. We expect FFC to pay an interim cash dividend of PKR2.50/sh. 

EFERT’s stance on prices will significantly dent earnings

Engro Fertilizer (EFERT) is expected to post 1Q profitability of PKR596mn (EPS: PKR0.45), down 85% yoy. Net Sales are expected to decline by 61%yoy owing to decreased Urea offtake amid pre-buying in December and price premium of almost PKR220/bag over competitors’ price (late and partial reduction of price post GIDC decision). As a result, EFERT’s market share declined by 15ppt yoy to 17% in 1Q. Moreover, lower urea prices amid GIDC discontinuation decreased gross margins by 2ppt yoy to 30%. We expect EFERT to announce a final cash dividend of PKR0.4/sh in 1Q. Reduction in GIDC on feed and fuel will trim the company’s future earnings as well as 70% of its production is based on concessionary gas.

FFBL’s core earnings to remain depressed

For Fauji Fertilizer Bin Qasim (FFBL) we expect unconsolidated NLAT of PKR1.34bn (LPS: PKR1.43) in 1Q as compared to NLAT of PKR1.87bn (LPS: PKR2.00) in the same period last year. The company’s DAP business losses are likely to ease off a little in 1Q due to (i) better sales (up 2.7xyoy) amid better prices and (ii) lower gas prices (reduction in GIDC). Urea sales also increased by 3.0x yoy in 1Q. Higher offtake, lower phos-acid prices and reduction in GIDC are expected to increase the gross margins to 6.2ppt yoy as compared to negative 19.5% GP margins in 1QCY19. Offsetting this, however, finance cost rose 66% yoy – maintaining a loss for the period. FFBL’s consolidated losses will rise as we expect FFL and Fauji Meat to remain in losses.