Equity Analysis /
Pakistan

Pakistan Fertilizers: Price hikes to result in lucrative earnings

  • Fertilizer companies have increased Urea prices following the measures recently approved in the Finance Bill

  • 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 and EFERT, due to attractive DY and sustainable earnings

Intermarket Securities
4 July 2022

Fertilizer companies have increased Urea prices by PKR350/bag, which effectively translates in to PKR380/bag hike, considering the abolishment of GST in the recently approved Finance Bill. FFBL is the only one left to join the bandwagon of urea price hike. FATIMA has also announced price hikes of CAN and NP by c.PKR270/PKR290 per bag. This is likely to increase earnings of FFC, EFERT and FATIMA by an average 42% (net of costs), given the price hike is not denounced by the government.

  • Finance Bill measures are attributed to the price hike: The price hike is largely attributed to the abolishment of GST (2% on Urea and other fertilizers), which will increase costs due to inability to claim input tax refunds from the government. Hence, the overall impact of c.PKR60/bag has been passed on to consumers. The earnings impact is contingent on reduced government intervention to reverse price hikes, as also seen historically when the sector raised prices by PKR150-250/bag to PKR1,880-1,980/bag (refer to sensitivity table on page 2).

  • Sector profitability will expand: The earnings of Fertilizer sector is set to expand post recent Urea price hike and the major beneficiary will be FFC and EFERT, as annualized earnings of both companies will increase by PKR7.53 and PKR6.24 per share, respectively, whereas the overall annualized EPS of FATIMA will increase by PKR2.87. 

  • Local DAP prices to pressure FFBL’s earnings: Although earnings accretion on FFBL is PKR1.65/share, in case it is unable to increase DAP prices (local prices linked with international price parity), the increase in non-refundable tax claims on DAP production is likely to result in a LPS of PKR1.68, in our view. We highlight, the input claim on Phos acid results in a cost hike of PKR361/bag (overall claims on DAP imply LPS of PKR3.33, if DAP prices aren’t increased).

  • Dividend yield will increase further: Fertilizer sector is already offering attractive dividend yield which is slated to increase further. Due to EFERT’s history of a healthy 100% payout, the incremental annualized payout will increase by nearly same amount as its earnings (dividend impact for the whole sector is given below).

  • FFC plant-shutdown: In an unfortunate incident, FFC announced the closure of its Mirpur-Mathelo plant (capacity of 718,000 tons) due to a technical fault. We await further details on a timeline for resumption of production. This may likely strain the overall Urea availability in CY22, as the plant contributes 11-14% of overall Urea capacity (unless peers like EFERT are able to capitalize and increase market share). However, according to channel checks, the company had already planned a month long maintenance shut-down later this week. Hence, we expect the negative EPS impact to be limited to PKR0.97 (CY22 EPS to PKR15.13, from PKR16.10, earlier), in our view.

Overweight: The sector is offering attractive CY23f dividend yield of 13% along with sustainable future earnings. We therefore reiterate our Overweight stance on the sector, with FFC and EFERT, as our top picks.