Profits of Pakistani fertilizer companies likely to rise for 4QCY20

Topline Securities expects its ‘Fertilizer Universe’ earnings to grow by 75%YoY for 4QCY20, mainly driven by improvement in earnings of Fauji Fertilizer Bin Qasim (FFBL). However, earnings are likely to decline by 12%QoQ. FFBL earnings are likely to decline by 12%YoY and 17%QoQ. The brokerage house expects CY20 earnings of the sector to grow by 34%YoY.

Urea sales are expected to decline by 2%YoY to 1.82 million tons for 4QCY20, while DAP offtake is likely to grow by 1%YoY to 876,000 tons for the quarter under review. Urea sales are expected to increase by 18%QoQ and DAP sales to increase 14%QoQ.

Full Urea sales will be 6.03 million tons (down 3% YoY), while DAP sales are expected to rise to 2.25 million tons (up 11% YoY).

Urea prices have declined by 15%YoY during 4QCY20 as all companies have passed on the benefit of reduction in Gas Infrastructure Development Cess (GIDC) to the final consumers. However, Urea prices have remained unchanged QoQ at Rs1,670/bag.

DAP prices were increased by 7%YoY and 13% QoQ to Rs3,969/bag, in line with increase in international DAP prices.

The brokerage house maintains its Market-Weight stance on Pakistan Fertilizer sector and its preferred scrip play is Fauji Fertilizer (FFC).

Fauji Fertilizer Company (FFC) is expected to post unconsolidated EPS of Rs4.1 (up 12%YoY) for 4QCY20. This is likely to take full year EPS to Rs14.9 (up 11% YoY). The increase in 4QCY20 earnings is mainly due to: 1) increase in DAP offtake by 25%YoY, 2) likely improvement in gross margins and 3) decline in finance cost due to lower interest rates. Earnings are likely to increase by 13%QoQ amidst: 1) increase in Urea and DAP offtake by 17%QoQ and 7%QoQ, respectively and 2) higher other income given high cash balance. Along with the result, FFC is expected to announce final cash dividend of Rs3.7/share, taking full-year cash payout to Rs11.5/share.

Engro Fertilizers (EFERT) consolidated EPS is estimated to decline by 30%YoY to Rs3.3 in 4QCY20 mainly due to the decline in Urea and DAP offtake by 15%YoY and 69%YoY respectively. Earnings are expected to drop by 37%QoQ due to: 1) absence of one time impact of tax reversal that was recorded in 3QCY20 and 2) decline in Urea and DAP offtake by 12%QoQ and 60%QoQ, respectively. This is likely to take EPS to Rs11.9 (down 6%YoY) for 2020. Along with the result, EFERT is anticipated to announce final cash dividend of Rs2.0/share, taking full-year payout to Rs11.0/share.

Fauji Fertilizer Bin Qasim (FFBL) is anticipated to post unconsolidated EPS of Rs2.7 (fully diluted) for 4QCY20 as compared to LPS of Rs2.7 for 4QCY19. The turnaround is expected due to: 1) increase in DAP offtake by 58%YoY, 2) improvement in gross margins amidst increase in DAP prices and reduction in GIDC and 3) decline in finance cost. This is likely to take EPS to Rs2.0 for 2020.

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