Karachi, March 15, 2022 (PPI-OT): FFC: Macro uncertainty calls for defensive plays

We revisit our investment case for Fauji Fertilizer Company Limited (FFC), upgrading our target price to PkR152/sh (previously PkR127/sh), implying an upside of 29%. Additionally, we expect a cumulative payout of PkR16/sh based on our assumption of 80% payout ratio, translating into DY of 14.5% at last close.

We expect the company to post earnings of PkR 19.8/sh (+15%YoY) driven by i) PkR80/bag hike in price, ii) 38%YoY growth in other income. Likewise, the company has net cash and short-term investments of ~PkR28/sh which makes the investment considerably less risky.

The recent hike of PkR80/bag inflates FFC’s profitability by PkR1.78/sh, thereby taking the gross margin to ~32% in CY22E in contrast to our earlier estimate of ~30%. We believe FFC is currently well placed than its peers as current macro-outlook (read: oil prices) directly impacts EFERT’s profitability due to its costly gas in old plant whose pricing is derived under PP-12 policy formula.

With international landed cost of urea at PkR6,200/bag, the gap still remains 3.3x wide which takes us to the conclusion that the recent hike is one of the many to come in near future, hence, the burden of gas tariff and GST rationalization being passed on to the consumers.