Equity Analysis /
Pakistan

Fauji Fertilizer: Pakistan Fertilizer: Improved pricing to lift Q2 profitability

    Intermarket Securities
    26 July 2019

    We expect the IMS Fertilizer Universe to post combined profitability of PKR11.0bn in 2QCY19 (up by 28%yoy) led by an increase in fertilizer prices by 10-30%yoy across all products. In 2Q alone, urea prices increased by c. PKR80/bag, more than offsetting the decline in fertilizer offtake of our coverage companies. 

    We expect FFC to outperform with 49%yoy growth in profitability mainly led by higher retention prices of urea. After a weak 1Q, we expect FFBL’s losses to reduce to PKR213mn (LPS of PKR0.23) in 2Q amid (i) strong growth in Urea/DAP offtake (up 13%/2.4x yoy) and (ii) improved prices (only company in our fertilizer coverage that has volumetric growth in 2Q). 

    The pending decision on GIDC is likely to be a key checkpoint for the sector. We think a possible 50% reduction in GIDC rates to offset the impact of increase in gas prices on feed/fuel by 62%/31% will be negative for concessionary based producers, namely EFERT and FATIMA and trim their recurring earnings by PKR0.7/sh and PK0.2/sh, respectively. However, this does not change our liking for EFERT which offers an attractive dividend yield of 17%.

    Increase in retention prices to more than offset weak offtake

    We expect the IMS Fertilizer Universe to post combined profitability of PKR11.0bn in 2QCY19, up by 28%yoy mainly due to an increase in retention prices of Urea (up 23%yoy) which more than offsets lower offtake. To highlight, fertilizer producers increased urea prices by PKR80/bag to PKR1,830/bag during 2Q, cashing in on lower inventory levels that fell to 134k tons in Mar’19. However, the market share of our universe (in urea) continued to decline amid smooth operations of AGL others. Urea offtake of the industry grew by 3%yoy to 1.5mn tons during 2Q in contrast to a 9%yoy decline for our universe. Resultantly, the market shares of FFC and EFERT reduced by 3-4ppt in 2Q to 41% and 30%, respectively. 

    EFERT: One offs may trim profitability

    We expect Engro Fertilizer (EFERT) to post 2QCY19 EPS of PKR2.81, up 15%yoy. Net Sales are expected to rise by 8%yoy amid higher retention prices of urea, compensating for the decline in Urea/Dap offtake by 8/14% yoy. As a result, we expect gross margins to improve by c. 5ppts yoy. An increase in finance cost amid higher interest rates will, however, keep a check on profitability growth, in our view. Moreover, reversal of deferred tax can trim earnings in CY19f by PKR1.3/sh, as per our estimates. We expect EFERT to announce an interim cash dividend of PKR4.0/sh.

    FFC will continue to outperform

    We expect Fauji Fertilizer (FFC) to post NPAT of PKR3.7bn (EPS: PKR2.88) in 2Q, up 49%yoy. The increase in profitability is mainly led by expansion in gross margins by c. 9ppt yoy on the back of higher urea retention prices (23%yoy). Other income (excl. subsidy) is expected to increase by 21%yoy owing to higher short-term investments amid increase in GIDC payables. However, increase in short-term borrowing and higher interest rate will increase finance cost by 2.1x yoy. We expect FFC to pay an interim cash dividend of PKR2.5/sh, taking total payout during 1HCY19 to PKR5.0/sh.

    FFBL losses to reduce in 2Q

    Fauji Fertilizer Bin Qasim (FFBL) is expected to post unconsolidated NLAT of PKR213mn (LPS: PKR0.23) in 2QCY19 as compared to NLAT of PKR544mn (LPS: PKR0.58) in the same period last year. After posting weak 1Q results, the core earnings of the company are likely to improve in 2Q on (i) strong growth in Urea/DAP offtake (up 13%/2.4x yoy) and (ii) improved prices. However, higher finance cost (up by 2.4xyoy) and lower other income (in the absence of dividend income) will likely drag the bottomline into the red.

    FATIMA: Earnings growth to continue 

    We expect Fatima Fertilizer (FATIMA) to post unconsolidated earnings of PKR3.8bn (EPS: PKR1.81) in 2Q, up 10%yoy. The growth in earnings should be led by higher fertilizer prices where average CAN/NP prices rose by 30%/13%yoy. This substantial growth in fertilizer prices and increase in NP sales by 28%yoy (NP sales contributing 56% of total sales) are likely to offset the decline in Urea/CAN offtake by 52%/6%yoy.

    Risks: (i) Unfavorable settlement of GIDC, (ii) Inventory buildup, and (iii) Low pricing power.