Fertilizer Result Previews

Dear Clients,

The fertilizer sector is set to post an increase in profitability during 1QCY21 supported by: 1) higher off-take, 2) improved urea/DAP prices and 3) a 625bps cut in interest rates. However, the earnings would decline on a sequential basis because of absence of one-time GIDC gain recorded in 4QCY20.

Fauji Fertilizer Company Limited (FFC) – Earnings to grow by 13% Y/Y: FFC’s earnings are estimated to grow by 13% Y/Y to PKR 4,823mn (EPS: PKR 3.79) during 1QCY21. The increase is attributable to: 1) jump in DAP off-take (+85% Y/Y to ~15kt), 2) rise in DAP prices (+33% Y/Y) and 3) lower interest rates, which were down 625bps to 7%. However, sequentially we expect the profitability to decline by 32% Q/Q. This is as a result of i) 26% decrease in top-line led by 71% Q/Q reduction in DAP offtakes and ii) absence of one-off GIDC gain realized in 4QCY20. Along with the result, we expect the company to announce an interim cash dividend of PKR 3.0/sh.

Engro Fertilizers Limited (EFERT) – Earnings projected to increase 8.0x Y/Y: EFERT’s earnings are projected to increase by 8.0x Y/Y to PKR 4,530mn (EPS: PKR 3.39) during 1QCY21. This is led by 3.5x Y/Y increase in urea offtake because of the low base effect. Recall that back in 1QCY20, FFC’s urea prices were reduced by PKR 400/bag post the removal of GIDC. EFERT, however, passed on a limited impact on account of its concessionary gas. The pricing discrepancy led to subdued urea sales for EFERT.

Additionally, higher DAP prices would further lend support to the profitability. Sequentially, the profitability is expected to decrease by 32% due to absence of one-time GIDC gain recorded in prior quarter. Along with the result, we expect the company to announce an interim cash dividend of PKR 3.0/sh.

Fauji Fertilizer Bin Qasim Limited (FFBL) – Rise in DAP prices to enhance profits: FFBL’s profitability is expected to land in positive territory in 1QCY21 after 5yrs of consecutive losses in first quarter. We anticipate the company to post earnings of PKR 1,366mn (EPS: PkR 1.06) as against a loss of PKR 3,048mn (LPS: PKR 2.36) during 1QCY20. Recovering profitability is estimated because of a 33% Y/Y increase in domestic DAP prices that would keep margin afloat. Additionally, 625bps reduction in interests would also reduce financial charges emanating from its debt-laden balance sheet. We do not expect any payout from the company due to its overall leverage (DE ratio: 2.7x as of Dec 30’20).

Regards,
KASB Research

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