A review of the financial results of Fauji Fertilizer Bin Qasim Ltd for the period of CY20

FFBL posted an NPAT of PKR2.2bn for CY20 (EPS: PKR1.70) – massive improvement vs NLAT of PKR5.9bn in CY19 (LPS: PKR4.59). On a consolidated basis, FFBL posted PKR6.45bn (EPS: PKR4.99) net profits in CY20 compared to losses of PKR6.37bn (LPS: PKR4.93) in CY19.

Key Takeaways from Analyst Briefing:

During CY20, Industry DAP sales clocked in at 2.17mn tons, up 11% YoY, while FFBL DAP offtake surged by 35% YoY to 926K tons. Higher food commodity prices and anticipation of subsidy led to higher offtake for the industry.

According to the company, DAP demand in CY20 was exceptional. It is expected to normalize in CY21 around CY18-19, due to lower inventory being held at the end of CY20 and elevated DAP prices in CY21. The international prices of DAP are expected to remain high due to a shortage of supply.

The management attributes (i) higher gross margins amid high DAP volumes and prices in 2HCY20, (ii) debt re-profiling and (iii) cost savings of c.PKR900mn in less travel and other overhead expenses – for the exceptional earnings growth in 2HCY20.

The core business’s profit margins are set to increase in CY21 due to specific cost savings and higher international DAP prices. FFBL has locked phosphoric acid prices of US$795/ton (EFR) for 1QCY21, where prices are likely to increase in the coming quarters.

Speaking of the subsidy on DAP, FFBL stated that, according to dealers, nothing had been paid to farmers as yet. Furthermore, as producers are not involved in this process, they do not have much information regarding this matter.

The company has booked an expense of PKR80mn due to disallowance of sales tax in unregistered dealers. After the recent amendment in the tax rate, most dealers will be registered, and the disallowable expense will decline in future results.

The plant’s standard turnaround time is usually one month, but in CY21 it prolonged to one and a half month due to non-availability of gas from SSGC during the period. After negotiating with the government, FFBL has been granted with firm gas supply from SSGC for the next five years.

There has been no progress on subsidy and sales tax refunds from the government, as the company has also paid nothing on the GIDC front. The payment schedule is also uncertain, but the management expects the issue to be resolved once they start paying the outstanding GIDC amount.

FFBL has shown its intention to sell its stake in Fauji Wind Power I & II. The management is hopeful that the deal will be finalized by the end of June 2021.

Speaking of Fauji Meat Limited (FML), FFBL is willing to form a joint venture with a group which has previous experience of running meat business. So far, that is the only option available for a turnaround of the company.

FFBL’s food business, Fauji Foods (FFL) is considered to be doing well (curtailing losses) and the reversal of impairment is only possible when FFL starts to turn a profit.

Courtesy – Intermarket Securities Limited.

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