Fauji Fertilizer Co. (FFC) has posted 3QCY22 unconsolidated NPAT of c.PKR5.2bn (EPS: PKR4.12), up 56% QoQ but down 19% YoY, missing our projected EPS of PKR4.60. The variance primarily stems from higher-than-expected distribution expenses and lower other income. This takes 9MCY22 NPAT to PKR14.8bn (EPS: PKR11.64) down 7% YoY. The company announced an interim cash DPS of PKR3.18 versus our expectation of PKR4.0.

Key result highlights:

 Net revenue reduced by 17% YoY and 14% QoQ owing to lower offtake. Topline of PKR24.5bn came in higher than our estimate of PKR22.5bn, likely due to higher retention prices and other fertilizer product volumes.

 Gross margins has increased by 0.8ppt YoY, but has reduced by 2.1ppt QoQ, to 38.6%, lower than our estimate of 44%. Breakdown at the Mir Mathelo plant in Jul’22, coupled with higher than expected realized gas prices led to the deviation, in our view.   

 Distribution expenses surged to PKR2.6bn, up 25% YoY and 23% QoQ. This is despite lower offtake, with the increase majorly driven by higher transportation expenses, in our view. 

 Among other line items: i) other income has increased to PKR2.9bn, up 69% YoY, but down 27% QoQ (IMS estimate of PKR3.5bn), and (ii) effective tax rate clocked in at 30% in 3QCY22 versus 26% in SPLY, due to super tax implication. We await detailed accounts for clarity on other income. 

FFC has posted a relatively weak result amid lower margins as well as other income, coupled with elevated expenses. Going forward, we believe that strong pricing power, coupled with higher Urea offtake will help the company post improved profitability. We maintain our Buy rating on the scrip with a Target Price of PKR136/sh.

Courtesy- Intermarket Securities Limited.