2QCY21 Review of Fauji Fertilizer

Fauji Fertilizer Company Ltd (FFC) has posted unconsolidated 2QCY21 NPAT of PKR3.62bn (EPS: PKR2.85), down 26% yoy. The result is below our expected EPS of PKR3.61, where the only deviation came from the unwinding of GIDC liability. The result is accompanied by an interim cash dividend of PKR2.60/sh (we expected PKR2.75/sh).

Key result highlights for 2QCY21:

  1. Despite a 19% yoy decline in Urea sales, Net revenues fell by only 3% yoy to PKR22.4bn due to higher Urea and DAP prices and DAP offtake (up 38% yoy).
  2. Gross margins have increased by 3ppt yoy to 35% in 2QCY21 (almost same as our expected margins of 35.3%). The reduction in GIDC, and higher retention prices of Urea (up c.5% yoy) and DAP (up c.49% yoy) are attributed for the elevated gross margins.
  3. Other income has decreased to PKR1.5bn (down 35% yoy) as compared with PKR2.3bn in 2QCY20. This can be attributed to lower dividend received from invested companies. FFC has also booked unwinding on GIDC payable of PKR1.1bn. This was the major deviation from our estimate.
  4. Finance cost has declined 17%/8% yoy/qoq to PKR0.4bn. This qoq decline is majorly due to decline in short-term borrowing as higher profitability is helping FFC to deleverage.
  5. Among other line items: (i) despite the decline in Urea sales, distribution expenses have increased by 5% yoy to PKR1.9bn, mainly on account of higher transportation and packaging costs, and (ii) FFC has booked an effective tax rate of 30% in 2QCY21 vs 28% in SPLY.

We have a Buy stance on FFC (TP PKR136/sh) based on rising earnings trajectory amid higher Urea/DAP prices and a DY of 13% is its main attraction.

Courtesy – Intermarket Securities Limited. 

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