Engro Fertilizers Limited (EFERT) reported an impressive earnings growth of 10.0x YoY to PKR 5.7Bn (EPS: PKR 4.3) in 1QCY21. Massive growth in profitability was primarily attributable to improved urea margins, higher urea offtake (↑ 3.5x YoY), and robust performance of its trading portfolio, including the DAP segment.

On the other hand, the sequential decline of 14% in earnings is attributable to an absence of a re-measurement gain on GIDC recorded in 4QCY20 and a higher effective tax rate (34% in 1QCY21 vs. 8% in 4QCY20).

The company also announced a surprise dividend of PKR 4.0/sh along with the result. This could be due to the withdrawal of tax exemption on inter-corporate dividends, and consequently, we can expect a bumper dividend in 2QCY21 as well. Key highlights of the result are summarized below:

Recall that the company’s urea sales were abnormally lower in 1QCY20 as they reduced urea prices by only PKR 160/bag following the elimination of GIDC levy due to its concessionary gas pricing. At the same time, the other industry players lowered it by PKR 300/bag. Due to the low base effect, urea volumes surged by a whopping 3.5x YoY to 0.6Mn tons in 1QCY21.

Additionally, DAP prices (↑ 39/19% YoY/QoQ) also rose significantly during 1QCY21 due to global supply disruptions. As a result, this translated into net revenue growth of 2.7/1.1x YoY/QoQ to PKR 29.4Bn during the period.

Due to improved urea margins following the removal of the GIDC levy in 1QCY20, gross margins witnessed an accretion of 5ppts YoY/QoQ to clock in at 39% during 1QCY21.

Finance costs decreased by a massive 78% YoY to PKR 0.3Bn owing to lower interest rate and debt levels. On the other hand, other income jumped by 83% YoY to PKR 0.5Bn during 1QCY21.

We maintain our BUY stance on the company with our Dec’21 TP of PKR 75.0/sh, which implies an upside of 15% from the last close.

Courtesy – BMA Capital Management Ltd.