Pakistan Fertilizer – Higher offtake to lift earnings

We expect combined earnings of IMS Fertilizer cluster to increase by 11% qoq to PKR9.2bn in 2QCY20. The increase in profitability is mainly led by (i) higher Urea offtake, amid pre buying before monsoon season and clarity regarding Urea subsidy and (ii) lower finance cost due to decline in interest rates.

Industry Urea offtake of 1.6mn tons in 2QCY20 was up 5% yoy. This should enable producers to post decent earnings in 2Q. This is because of slow offtake in the previous quarter amid lockdowns, followed by pre-buying in June, in our view.

However, slower expected demand in 3Q20 will likely moderate full-year earnings. Also, dealers are presently selling Urea at PKR1,530/bag in Sindh. This might indicate that producers are offering discounts to avoid inventory pile up.

FFC to post flattish earnings

We expect Fauji Fertilizer (FFC) to post 2QCY20 NPAT of PKR5.24bn (EPS: PKR4.12), up 1% yoy, led by (i) the 9% yoy increase in Urea offtake (market share up to 43% vs 41% in 2Q19), and (ii) discontinuation of GIDC on feed and fuel gases which has elevated the company’s gross margins, which we expect will increase by about 4ppt yoy to 38%. Other income is expected to remain depressed (down by 14% yoy) mainly because of lower interest rates, which will also lead to 30% yoy lower finance costs. We expect FFC to pay an interim cash dividend of PKR3.50/sh, taking 1H20 payout to PKR6.0/sh. We have a Neutral stance on FFC (TP PKR120/sh), where a dividend yield of 10% is balanced by lack of growth prospects.

Higher offtake will boost EFERT’s earning

Engro Fertilizer (EFERT) is expected to post 2QCY20 NPAT of PKR4.80bn (EPS: PKR3.59), up 51%yoy. Net Sales are expected to decrease by 1%yoy owing lower to Urea prices. However, Urea offtake increased an impressive 47% yoy because of unusually low offtake in 1QCY20 (EFERT delayed price cuts post GIDC cut in January). The impact of higher Urea offtake and discontinuation of GIDC are expected to increase gross margins by 12ppt yoy. EFERT’s other income is expected to decline by 83% yoy due to a one-off in 2QCY19, in our view. We expect EFERT to announce a final cash dividend of PKR3.0/sh. We have a Neutral stance on EFERT (TP PKR66/sh) where we flag a CY21f dividend yield of 16%.

Lower DAP margins will expand FFBL’s core losses

Fauji Fertilizer Bin Qasim (FFBL) is expected to post an unconsolidated NLAT of PKR598mn (LPS: PKR0.64) in 2QCY20 as compared to an NLAT of PKR84mn (LPS: PKR0.09) in the same period last year. The core earnings of FFBL are likely to deteriorate in 2QCY20 due to (i) weak Urea sales (down 43%yoy) and (ii) lower DAP prices in tandem with lower international DAP prices. Lower finance costs (down by 23%yoy) should reduce company’s net losses. However, FFBL’s consolidated earnings will be more depressed than in previous quarters, as Fauji Foods and Fauji Meat will continue to post losses, in our view. The key catalysts for FFBL remains rise in global DAP primary margins and potential divestment of its ailing Food businesses, in our view. ( Intermarket Securities Limited.)


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