Profits to surge sequentially amid normalized tax rate
Despite the sequential decline in fertilizer volumes owing to floods and short-lived plant breakdowns of EFERT and FFC, IMS Fertilizer Universe earnings are estimated to increase by a sharp 3.4x QoQ to PKR17.8bn due to lower tax rate, elevated fertilizer prices and strong interest income.
Industry Urea/DAP offtake is estimated to clock in at 1.52/0.14mn tons in 3QCY22, down 13%/77% YoY, owing to floods, and high DAP prices in case of DAP offtake.
IMS Fertilizer Universe net profit is expected to rise by a mere 1% YoY, with the massive decline in offtake offsetting the positives. Higher Urea and DAP prices, coupled with an absence of one-off expenses for FFBL will support profitability.
FFC: Earnings to rise despite lower offtake
Fauji Fertilizer Company (FFC) is expected to post 3QCY22 unconsolidated earnings of PKR5.8bn (EPS: PKR4.60), up 74% sequentially. The QoQ increase in profitability is due to (i) lower tax rate amid one-off super tax impact in the previous quarter, (ii) elevated interest income and (iii) 3ppt QoQ increase in margins to 44% from the increase in Urea and DAP prices. However, Urea volumes are expected to decline amid floods, while DAP offtake will likely decline due to elevated prices leading to inventory piling up with dealers. We expect an interim cash dividend of PKR4.0/sh, which would take 9MCY22 DPS to PKR9.80. We reiterate our Buy stance on FFC (TP PKR136/sh), due to better future prospects amid pricing power and decent dividend yield.
EFERT: Profitability and dividend to rebound
Engro Fertilizer (EFERT) is expected to post 3QCY22 net profit of PKR4.8bn (EPS: PKR3.61), up from a loss of PKR98mn in 2Q. This is majorly due to (i) lower effective tax rate, (ii) higher Urea and DAP prices, and (iii) higher trading margins on DAP. Gross margin is likely to rise by 1.5ppt QoQ to 32% in 3QCY22. We expect EFERT to announce an interim cash dividend of PKR3.5/sh. However, the company has a potential to announce a higher dividend, considering its past practice. We presently have a Buy stance on EFERT (TP PKR92/sh), with estimates subject to revision after a potential Urea and gas price hike. This will not only increase our earnings forecast and valuations, but also improve dividend yield in coming years, reinforcing our liking for the scrip particularly in the case of the emergence of a down cycle in interest rates.
FFBL: Higher DAP prices to offset low volumes
Despite the decline in DAP/Urea volumes by 75%/26% YoY, we expect Fauji Fertilizer Bin Qasim (FFBL) to post an unconsolidated NPAT of PKR2.3bn (EPS: PKR1.77) in 3QCY22, flat SPLY. This is due to significant decline in other expenses where the company booked impairment and credit loss of PKR4.45bn on its subsidiary FML in 3QCY21. Gross margins are likely to reduce by 2.8ppt YoY to 19.4% in 3Q. This is due to lower than adequate increase in DAP prices as compared to Phos Acid prices, and lower volumes. 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 PKR37/sh).
FATIMA: Higher revenue to maintain profits
Fatima Fertilizer (FATIMA) is expected to post net profits of PKR4.8bn (EPS: PKR2.29 in 3QCY22), remaining flat compared to SPLY. This is despite (i) higher margins on NP and DAP, and (ii) increase in all fertilizer product prices and CAN volumes, as gross margin is expected to decline by c.8.6ppt to 34% YoY to due to likely lower subsidy disbursements. We presently have a Neutral stance on FATIMA with a TP of PKR39/sh, but we look to revise our estimates amid better future outlook and higher pricing power going forward.