Fauji Fertilizer Company Limited (FFC) recently held its analyst briefing session discussing CY20 results and business outlook. To recall, the company recorded 22% YoY increase in profitability to PKR 20.8Bn as opposed to PKR 17.1Bn (EPS: PKR 13.4) in CY19. Key highlights of the briefing are discussed below:
Better profitability during CY20 is mainly on account of 1) improving urea margins due to removal of GIDC 2) one-time gain of PKR 5.9Bn due to re-measurement of GIDC liability, and 3) lower finance costs (↓ 24% YoY).
The industry urea offtake declined by 3% YoY during CY20 and clocked-in at 6.0Mn tons, whereas FFC recorded modest growth of 2% YoY in sales volume to 2.5Mn tons. During CY20, FFC’s market share in the urea segment expanded slightly by 2.0 points to 42%, followed by EFERT, FATIMA and FFBL at 34%, 13% and 9%, respectively. On the other hand, the company’s market share in DAP segment stood at 10% during CY20 compared to 12% in SPLY. FFBL holds the largest share in the segment at 41%.
Currently, the dealer transfer prices for Sona Urea are around PKR 1,667 per bag which is 1.9x less than the international urea prices at PKR 3,200/bag. On the other hand, DAP prices are hovering near PKR 4,250 per bag.
On the GIDC front, the payment timeline has been extended to 48 equal monthly instalments, however, the company has obtained a stay order from Sindh High Court (SHC) by filing suit for the factual determination of the liability. The company booked one-time after-tax gain of PKR 3.9Bn during 4QCY20 on account of remeasurement of liability which will be reversed fully in subsequent years. Currently, the total GIDC liability stands at PKR 56.7Bn out of which PKR 23.9Bn is categorized as current-portion, whereas PKR 32.8Bn is classified as long-term portion.
The company recorded impairment charges of PKR 1.0Bn on Fauji Fresh N Freeze (FFF) as its operations were severely impacted by the COVID-19 pandemic. During CY20, the company also injected PKR 1.5Bn in FFF to ease working capital constraints. The net investment in the subsidiary is now recorded at PKR 4.2Bn.
Additionally, owing to considerable delays in the subsidy settlement by the government, the company also booked expected credit loss of PKR 0.9Bn. As per the management, they are hopeful that the full amount will be recovered from the government soon.
Moving forward, the company is considering further equity injection of USD 14.4Mn in Thal Energy Limited (TEL) in CY21 onwards. They are also evaluating acquisition of majority stake in Fauji Wind Energy Limited (FEW) I and II. Moreover, the company is also in talks with the government to set up a DAP production facility in the country, but the project is still at its initial stages.
In coming months, FBR is planning to roll-out its tax stamp for track and trace system which may pose some operational difficulties for the company.
We maintain our BUY stance on the company with our Dec’21 TP of PKR 131/sh, which implies a total return of 31% from the last market close.
Courtesy by: BMA Capital Management Ltd.