According to NFDC, Urea sales in Aug’22 witnessed a slight recovery in sales, although down 15% compared to last year to c.552,000 tons (slump in Jul’22 was 26%). Sequentially, urea offtake recovered owing to i) normalized production post-breakdown of both FFC and EFERT in Jul’22, and ii) seasonality factor. The urea demand for 8MCY22 now stands at 4.3mn tons, against 4.2mn tons last year, where offtake of FATIMA rose by 31%, while that of Fauji group and EFERT declined by 1%/16%, respectively. We remain Overweight on the sector owed to handsome payout and sustainable earnings. However, offtake is likely to remain strained over the next couple of months owing to ongoing floods.
Urea ex-factory prices remained unchanged during the month, following the PKR350/bag increase in Jul’22. However, dealer premium in the local market remained elevated during the month.
Industry urea inventory level stood at c.195,000 tons in Aug’22, down from c.205,000 tons in the previous month, while up from c.187,000 in Aug’21.
Owing to an expected slump in urea demand, as agricultural landscape continues to remain affected from floods. Imported urea demand will likely be replenished once the inundated area is rehabilitated.
DAP offtake declined to c.26.000 tons, down a sharp 86% YoY, the lowest since Feb’13, owing to spike in international DAP prices, PKR slippage and recent floods. During the month, both FFC and FFBL reduced prices by c.PKR1,000/bag to PKR13,800/bag. Also, during the month, DAP inventory increased to c.426,000 tons from c.374,000 tons last month.
Going forward, fertilizer offtake is likely to decrease in the coming months owing to the recent floods, which continue to wreak havoc in the country, before rebounding in the last quarter and normalizing in CY23, in our view. Also, in light of increased gas demand by Europe for winters, a lot of global fertilizer manufacturers are halting production, which will likely increase the international urea prices.
Better gas availability will ensure elevated production levels for the industry, whereas potential further urea price hikes due to expected rise in gas prices, reinforce our liking for the sector, more specifically taking precedence from post-floods demand revival in 2010. After incorporating an upcoming price hike of PKR350/bag (to pass on gas prices hike), EFERT remains our top pick in the fertilizer space with a potential dividend yield of 22% and a TP of PKR 92/share.
Courtesy – Intermarket Securities Limited.