Urea offtake jumped 47% MoM in Jun’22 to 736k tons as preemptive demand growth surfaced in anticipation of urea price hike. Earlier in Jun’22, government reduced urea prices whilst ensuring resolution of liquidity issues, especially the PKR80bn receivables pertaining to sales tax and subsidies. The urea demand for 1HCY22 now stands at 3.2mn tons against 2.9mn tons last year, where offtake of Fauji Group (FFC and FFBL) rose c.15% YoY and EFERT decreased c.5% YoY.
We remain Overweight on the fertilizer sector following the urea price hike of PKR350/bag from budgetary changes, while small inventory backlog will also add to the better earnings and payout momentum in Sep’22 quarter after most of the super tax is accounted in Jun’22.
Urea ex-factory prices were reduced to PKR1,810/bag early Jun’22 from PKR1,980/bag (EFERT) and PKR1,880/bag (others). However, dealer’s premium in the local market remained high keeping prices at close to prior levels. Also, in light of the FY23 budgetary measures, producers increased prices to PKR2,155/bag in Jul’22.
Industry Urea inventory levels decreased to c.256,000 tons at the end of Jun’22, compared to c.467,000 tons at the end of May’22. This is attributed to higher monthly offtake and no imports during the month. To recall, the government had imported c.100,000 tons of Urea earlier in the year (due to low inventory levels) and plans on importing another 200,000 tons in the coming months for food security reasons.
DAP offtake for Jun’22 is up 54% MoM to c.145,000 tons. The surge in offtake is likely due to low base, anticipated price hike from budgetary announcements and PKR devaluation. DAP inventory during the month remained unchanged at c.337,000 from last month. DAP prices have increased recently by c.PKR1,500/bag to PKR13,600 and FFBL’s is likely the prime beneficiary of high inventory.
In 2HCY22, we believe that better availability of gas to local producers will help produce and sell higher Urea amid better farm economics, and elevated commodity prices will help the sector maintain its pricing power. This will help the fertilizer sector in posting healthy earnings and payouts. However, uncertainty regarding government intervention on pricing is likely to keep sector earnings in check.
We maintain our Overweight stance on the sector, with a preference for FFC and EFERT, each offering a 12-month dividend yield of 13%.
Courtesy – Intermarket Securities Limited