Equity Analysis /
Pakistan

Pakistan Fertilizer: Increasing Urea prices will expand dividend yields

  • As per our channel checks, FFC and FFBL have increased Urea prices by PKR80/bag; EFERT and FATIMA likely to follow

  • FFC and EFERT are likely to be the major beneficiaries, potentially leading to greater dividend payout post-price hike

  • We are Overweight on the sector, preferring FFC (TP PKR140/sh) & EFERT (TP PKR95/sh) due to attractive CY22f DY

Intermarket Securities
14 March 2022
  • Urea prices have increased: As per channel checks, FFC and FFBL have increased Urea prices by PKR80/bag, taking them to c.PKR1,810/bag, effective 13 March 2022. We think that EFERT and FATIMA are likely to follow suit. The increase in price is majorly aimed at passing on inflationary pressures such as the increase in packaging and transportation costs.

  • Multiple factors have created room for more hikes: According to NFDC data, Urea Inventory levels in January 2022 had declined to c.27,000 tons — representing a 13yr low level. This was largely due to higher offtake in CY21 and possible smuggling of Urea to Afghanistan and other Central European countries, in our view. Reduced Urea inventory level, coupled with massive surge in international Urea prices and strong farm economics, has strengthened the pricing power for producers. Also, there are chances that producers will further increase prices either to pass on any gas price hikes (due to WACOG Bill) or any other cost pressures.

  • Sector profitability will expand: The earnings of Fertilizer sector is set to expand post recent Urea price hike. The major beneficiary will be FFC and EFERT, as the annualized earnings of the two companies will increase by c.PKR2.12/sh and c.PKR1.73/sh, respectively; whereas, that of FATIMA and FFBL will increase by c.PKR0.55/sh and c.PKR0.45/sh, respectively.

  • Dividend yields will become more attractive: The Fertilizer sector is already offering attractive dividend yields, and this is set to increase further. Due to EFERT’s history of c.100% payout, the incremental annualized DPS will increase by the same amount as its earnings (dividend impact for the whole sector is given below).

  • Overweight: The sector is offering attractive dividend yields — comparable with the yields on 10yr PIBs —along with sustainable future earnings. We therefore reiterate our Overweight stance on the sector, with FFC (TP: PKR140/sh) and EFERT (TP of PKR95/sh) as our top picks.