FFBL posted unconsolidated NLAT of PKR467mn (LPS: PKR0.50) in 3Q19, better than our projected NLAT of PKR770mn (LPS: PKR0.82). The decline in profitability is mainly on account of (i) weak urea sales (down by 27%yoy), (ii) lower GMs owing to hike in gas prices (feed/fuel up 62%/31%yoy), and (iii) higher effective tax charge of PKR1.6bn. Although other income remained upbeat owing to hefty dividend income of PKR2.0bn from its subsidiaries (not expected in our estimates), the gains were eroded by higher effective tax rate. This brings 9M19 NLAT to PKR2.4bn (LPS: PKR2.59).

3Q19 Key result highlights:

§ Net revenues increased by 19%yoy to PKR22.1bn mainly due to improved urea and DAP prices. However, offtake showed mixed trend where DAP sales jumped by 19%yoy while Urea offtake declined by 27%yoy. The decline in urea sales is mainly on account of dilution in market share owing to increased sales by LNG-based producers and imports. Note that FFBL’s market share has declined to 8% in urea segment, down 3ppt yoy. On the contrary, DAP sales improved in 3Q post weak 1H sales owing to decline in hefty inventory of importers, paving way for growth in FFBL’s sales.

§ Gross margins declined by 8ppt yoy to 10% in 3Q. The gains from decline in phosphoric acid prices (down 11%yoy) were completely offset by (i) hike in gas prices (feed/fuel up by 62%/31%yoy), the impact of which was withheld by manufacturers during Jul-Aug’19, and (ii) PKR devaluation (22%yoy). Note that the impact of increase in gas prices on DAP cannot be passed-on unlike Urea as DAP pricing is based on import parity.

§ Finance cost elevated to PKR1.4bn, up 2.4x yoy, due to increased borrowing and higher interest rates. Recall that the increase in borrowings of FFBL is despite pile-up of GIDC accruals of PKR18.6bn (as per our estimates for 1HCY19).

§ Other line items include: (i) significant tax charge amounting to PKR1.6bn, offsetting the gains from other income, (ii) other income of PKR2.1bn potentially owing to dividend income from its subsidiaries, and (iii) potential exchange gain in other expenses.

The dismal performance in core business and losses from Fauji Foods are adding on to the company’s woes. Although 4Q result is expected to be better on sequential basis owing to seasonality, profitability is unlikely to post a healthy growth on yoy basis, in our view. We believe (i) absence of dividend income from its power subsidiary (already realized in 3Q), and (ii) failure to pass on the impact of increased gas prices on DAP amid depressed international DAP prices will contain the profitability. (Courtesy : Intermarket Securities Limited.)