Equity Analysis /
Pakistan

Pakistan Fertilizers: 2Q22 previews – earnings to falter from budgetary measures

  • IMS Fertilizer Universe earnings are expected to decline by 30% YoY, owing to imposition of taxes in Budget FY23

  • Industry Urea/DAP offtake is estimated to clock in at c.1.54/0.29mn tons in 2QCY22, up c.5%/50% YoY

  • Payouts are likely to remain muted in 2Q; EFERT can surprise with a higher payout, as per recent practice, in our view

Intermarket Securities
20 July 2022
  • IMS Fertilizer Universe earnings are estimated to decline by a sharp 30% YoY to PKR11.5bn owing to the imposition of supertax and poverty alleviation tax in Budget FY23. Excluding these, NPAT would have been up c.45% YoY.

  • Industry Urea/DAP offtake is estimated to clock in at c.1.54/0.29mn tons in 2QCY22, up c.5%/50% over the last year. Higher DAP sales are mainly attributable to low base effect amid massive offtake in 1QCY21.

  • Sequentially, combined net profit of our Fertilizer Universe is expected to decrease by a similar c.40% QoQ, due to aforementioned factors. Payouts are likely to remain muted in 2Q, but EFERT can surprise with higher payout, as per their recent practice.

FFC: Earnings attrition amid surge in tax charge

Fauji Fertilizer Company (FFC) is expected to post 2QCY22 unconsolidated earnings of PKR2.9bn (EPS: PKR2.25), down c.20% YoY. The imposition of new taxes is likely to weigh heavily on earnings, as we estimate effective tax rate to clock in at c.70% across the board. Excluding supertax, 2QCY22 estimated earnings could have been PKR6.6bn (EPS: PKR5.19), led by (i) higher gross margin which is expected to increase c.3ppt YoY to 38% because of higher fertilizer prices, and (ii) higher other income amid elevated interest rates and cash balances. We expect an interim cash dividend of PKR1.75/sh, which would take 1H DPS to PKR5.45. We reiterate our Buy stance on FFC (TP PKR136/sh), due to better future prospects amid handsome pricing power and handsome dividend yield.

EFERT: Payout to remain healthy despite supertax

Engro Fertilizer (EFERT) is expected to post 2QCY22 net profit of PKR1.7bn (EPS: PKR1.27), down a sharp c.65% YoY. The decline is majorly due to (i) higher taxation, (ii) lower Urea offtake, down by a mere 3% YoY amid high base effect; and (ii) discontinuation of concessionary feed gas for Enven plant, which ended in June 2021. Therefore, gross margin is likely to come off by 7ppt YoY to 31% in 2QCY22. That said, some support should come from higher Urea prices and elevated DAP margins. We expect EFERT to announce an interim cash dividend of PKR1.75/sh. However, the company has the potential to announce a higher dividend, considering its recent practice. We presently have a Buy stance on EFERT (TP PKR92/sh), with estimates yet to be revised after a potential Urea and gas price hike. Not only this will increase TP and EPS but also improve dividend yield in coming years in the current rising interest rate environment.

FFBL: Strong dividend from PMP to boost earnings

We expect Fauji Fertilizer Bin Qasim (FFBL) to post an unconsolidated NPAT of PKR2.7bn (EPS: PKR2.11) in 2QCY22 compared to a profit of PKR2.6bn (EPS: PKR2.02) in SPLY. FFBL’s core profit is likely to increase due to a sharp c.70% YoY increase in DAP offtake to c.196,000 tons (Urea offtake likely to decline by a mere 3% YoY). Resultantly, gross margin in 2Q is likely to remain flattish YoY at c.20%. Also, we estimate a handsome dividend payout from PMP of c.PKR1bn amid strong profitability. On a consolidated level, losses from Fauji Foods (FFL) will likely be curtailed amid better sales and lower finance cost post right issuance. However, losses from Fauji Meat (FML) are likely to hit FFBL’s consolidated profit. We have a Buy stance on FFBL (TP PKR29/sh).

FATIMA: Supertax to offset strong revenue growth

Fatima Fertilizer (FATIMA) is expected to post net profits of PKR4.2bn (EPS: PKR2.03), compared to a net profit of PKR5.5bn (EPS: PKR2.64) in SPLY. This is mainly due to (i) higher margins on NP and DAP, and (ii) increase in all fertilizer offtakes except CAN. The company’s gross margin, however, is expected to decline by c.5ppt YoY to due to lower subsidy disbursements assumed. We presently have a Buy stance on FATIMA with a TP of PKR39/sh.