Equity Analysis /

Pakistan Fertilizers: 4QCY19 results preview

    Intermarket Securities
    28 January 2020

    Better sequential earnings will disguise weakness ahead

    • We expect cumulative earnings of IMS Fertilizer cluster to increase by 6% qoq to PKR14bn in 4QCY19 – mainly led by (i) higher Urea offtake, due to anticipation of increase in gas prices and (ii) increase in DAP prices, amid seasonal uptrend.
    • Urea offtake of 1.85mn tons in 4QCY19 was up 10% yoy. While such strong offtake will shore up 4Q profits, excess inventory with dealers will moderate offtake in the coming quarter, amid diminishing pricing power of the producers, in our view.
    • The impending removal of GIDC will also keep a check on Urea prices and will significantly downgrade earnings of concessionary gas-based producers, in our view. In light of the aforementioned risk factors, we maintain our Underweight stance on the sector.

    FFC’s earnings to drop on reduced Urea primary margins

    We expect Fauji Fertilizer (FFC) to post 4QCY20 NPAT of PKR5.1bn (EPS: PKR3.98), down 14%yoy, amid (i) 56%yoy decline in DAP offtake (market share down to 13% vs 18% in 3Q18), and (ii) drop in Urea’s primary margins amid hike in gas prices despite commensurate increase in Urea prices. Note that FFC remains highly sensitive to impact of industry gas prices (lack of concessionary gas arrangement). CY19 earnings will thus clock in at PKR15.4bn (EPS: PKR13.78), up 21%yoy. We expect FFC’s gross margins to increase by about 1ppt yoy to 29% because of increase in urea prices. Other income is expected to remain elevated (up by 15% yoy) mainly owing to hefty cash balance, courtesy pile up of GIDC accruals plus higher interest rates. This will more than offset the impact of increase in borrowing cost amid higher interest rates, in our view. We expect FFC to pay a final cash dividend of PKR3.50/sh, taking total payout during CY19 to PKR11.05/sh. 

    EFERT likely to take advantage of Urea prices hike 

    Engro Fertilizer (EFERT) is expected to post 4QCY19 profitability of PKR6.1bn (EPS: PKR4.59), up 19% yoy. Net Sales are expected to increase by 5%yoy owing to increase in Urea offtake by 29% yoy. Impact of higher Urea price is estimated to increase gross margins by 5ppt yoy to 34%. Also, higher other income by 4.2x yoy will keep earnings elevated, in our view. We expect EFERT to announce a final cash dividend of PKR1.0/sh (full year payout: PKR12/sh). However, a potential reduction in GIDC will trim the company’s future earnings significantly as 70% of EFERT production is based on concessionary gas price and reduction in Urea prices will eat into its profitability.

    FFBL’s core earnings to remain depressed

    For Fauji Fertilizer Bin Qasim (FFBL) we expect unconsolidated NPAT of PKR316mn (EPS: PKR0.34) in 4QCY19 as compared to NPAT of PKR1.64bn (EPS: PKR1.76) in the same period last year. The core earnings of FFBL are likely to deteriorate in 4Q due to (i) weak DAP sales (down 38%yoy) amid higher DAP prices and (ii) higher gas prices (without adequate pass-on). This is likely to offset the 105%yoy growth estimated in Urea sales. Higher finance cost (up by 2.2xyoy) is another impediment that is keeping a check on profitability. The company’s consolidated earnings will be even more depressed as FFL has posted an LPS of PKR4.65 for 4QCY19, and Fauji Meat will also continue to be a drag on consolidated profits, in our view.