Earnings Report /
Pakistan

Pakistan Fertilizers: Profits to surge sequentially on better Urea volumes

  • IMS Fertilizer Universe earnings are estimated to increase by 38% QoQ to PKR16.2bn due to higher Urea and DAP offtake.

  • Industry Urea/DAP offtake is estimated to clock in at 1.85/0.52mn tons in 4QCY22, from 1.69/0.60mn tons in 4QCY21.

  • Fertilizer sector net profit is expected to reduce by 3% YoY, due to reduction in DAP volumes and primary margins

Intermarket Securities
25 January 2023

IMS Fertilizer Universe earnings are estimated to increase by 38% QoQ to PKR16.2bn due to higher Urea and DAP offtake, strong other income for FFC and absence of one-off exchange losses particularly for FFBL.

Industry Urea/DAP offtake is estimated to clock in at 1.85/0.52mn tons in 4QCY22, from 1.69/0.60mn tons in 4QCY21. Urea offtake increased amid higher demand post floods and anticipation of price hikes, while DAP volumes reduced due to higher prices and sluggish demand. 

IMS Fertilizer Universe net profit is expected to reduce by 3% YoY, due to reduction in DAP volumes and primary margins, alongside a sharp increase in interest expenses and distribution cost.

FFC: Higher offtake to boost earnings

Fauji Fertilizer Company (FFC) is expected to post 4QCY22 unconsolidated earnings of PKR6.2bn (EPS: PKR4.91), up 19%/4% QoQ/YoY. This will take CY22 NPAT to PKR21.1bn (EPS: PKR16.59).  The sequential increase in profitability is due to higher Urea and DAP offtake, and 3ppt QoQ increase in gross margins to 42% from better absorption of fixed overheads. Urea volumes are expected to rebound post floods and anticipation of price hike. DAP offtake is projected to decline 85% YoY, due to elevated prices and higher inventory being carried by the dealers. We expect an interim cash dividend of PKR4.00/sh, which would take CY22 DPS to PKR12.98. We reiterate our Buy stance on FFC (TP PKR120/sh), owing to better future prospects amid pricing power and decent dividend yield.

EFERT: Profitability to increase despite lower production

Engro Fertilizer (EFERT) is expected to post 4QCY22 net profit of PKR4.6bn (EPS: PKR3.43), up 9% QoQ, but down 26% YoY. This will take CY22 NPAT to PKR14.2bn (EPS: PKR10.61). Despite the decline in Urea volumes due to base plant maintenance shutdown, QoQ earnings are expected to increase due to higher DAP volumes on seasonality. Gross margins are likely to remain constant QoQ at 27.5% in 4QCY22. We expect EFERT to announce an interim cash dividend of PKR3.5/sh. This will cumulatively take CY22 dividend to PKR12.0/sh. However, the company has a potential to announce a higher dividend in 4Q, considering its past practice. We have a Buy stance on EFERT (TP PKR95/sh), with estimates subject to revision after the recent increase in Urea prices by PKR190/bag and increased capacity of base plant post debottlenecking. These factors will not only increase our earnings forecasts 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: Lower margins to get support from reduced other expenses

We expect Fauji Fertilizer Bin Qasim (FFBL) to post an unconsolidated NPAT of PKR1.6bn (EPS: PKR1.21) in 4QCY22, versus NLAT of PKR1.7bn (LPS: PKR1.31) in 3QCY22. This will take CY22 NPAT to PKR3.3bn (EPS: PKR2.53). This is due to significant decline in other expenses where the company booked an exchange loss of PKR4.2bn in 3QCY22. Gross margins are likely to reduce by 4.8ppt/6.3ppt QoQ/YoY to 11.8% in 3Q. The slight sequential improvement is due to reduction in local DAP prices in tandem with international prices, and reduced local demand too. In addition, Phos acid was procured at higher prices. On a consolidated level, losses from Fauji Foods (FFL) and Fauji Meat (FML) will likely expand amid elevated interest rates reduced demand and higher COGS. These factors are expected to hit FFBL’s consolidated profit. We have a Buy stance on FFBL (TP PKR22/sh).

FATIMA: Profits may slip due to volume contraction

Fatima Fertilizer (FATIMA) is expected to post 4QCY22 net profits of PKR3.8bn (EPS: PKR1.83), down 5%/12% QoQ/YoY. This will take CY22 NPAT to PKR13.8bn (EPS: PKR6.55). The 4Q decline is due to (i) lower NP and CAN offtake, and (ii) reduction in NP prices. Gross margins are expected to increase by 1.6ppt/9.7ppt QoQ/YoY to 27% in 4QCY22, owing to increase in Urea and CAN prices and subsidy disbursements too. The company is expected to pay final cash dividend of PKR3.0/sh in 4QCY22. We presently have a Neutral stance on FATIMA with a TP of PKR40/sh.