Earnings Report /
Pakistan

Fauji Fertilizer: Q1 CY 20 review: Delay in GIDC pass-on cuts elevated gross margins

  • Fauji Fertilizer Company (FFC) posted Q1 CY 20 NPAT of PKR4.3bn (EPS: PKR3.35), up 15% yoy

  • Gross margins increased by 7ppts to 37% in Q1 CY 20, on 99% reduction in GIDC

  • Government’s decision to reduce GIDC for producers has an overall neutral impact on FFC earnings, in our view

Intermarket Securities
27 April 2020

Fauji Fertilizer Company Ltd (FFC) posted 1QCY20 NPAT of PKR4.3bn (EPS: PKR3.35), up 15% yoy. The result was slightly below our NPAT expectation of PKR4.5bn (EPS: PKR3.56) mainly due to (i) lower gross margins by 1ppt, and (ii) lower other income. FFC also announced an interim cash dividend of PKR2.5/sh, in line with our expectation. 

Key highlights:

  • Net revenues increased by 2% yoy to PKR20.6bn in 1QCY20 – amid slightly higher offtake of Urea which increased by 4% yoy to 583k tons in 1QCY20, while Urea prices declined by 6% yoy to PKR1,640/bag.
  • Gross margins of the company increased by 7ppt to 37% in 1QCY20, upon 99% reduction in GIDC on both feed and fuel gas and the subsequent delay in pass-on in Urea prices by FFC, which led to the jump in gross margins.
  • Finance cost elevated to PKR673mn, up 44% yoy, due to increased borrowing and higher interest rates. Recall that the increase in borrowings of FFC is despite pile-up of GIDC accruals.
  • Effective tax rate clocked in at 28% in 1QCY20 as compared to 26% in same period last year.
  • Among other line items: (i) other expenses increased by 16%yoy on account of employees’ pension funds deducted on higher profitability on proportionate basis, in our view.

The government’s decision to reduce GIDC for Fertilizer producers by 99% has an overall neutral impact on FFC earnings, in our view, as its production is completely based on normal gas rates. So recent decrease in Urea prices will balance the GIDC impact. Moreover, GIDC settlement case is still pending at the Supreme Court, where any favorable decision will lead to a one-off gain on its income statement and may also lead to a special dividend, in our view. FFC also offer 12% dividend yield (apart from the potential special dividend). Based on a Target Price of PKR104/sh we have a Neutral stance on FFC.