Karachi, November 04, 2022 (PPI-OT): FFBL: Hopes pinned on normalized commodity prices

After enjoying better primary margins during 1HCY22, Fauji Fertilizer Bin Qasim Limited (FFBL) witnessed a decline at gross level during 3QCY22 due to cost side pressures despite higher retention prices. The company posted a loss of Rs1.7bn in 3QCY22 translating into an LPS of Rs1.31.

Management, in its Corporate Briefing yesterday, remained hopeful for improvement in 4QCY22 in light of consistent decline in global commodity prices.

Lower expected Phosphoric acid prices are expected to offset impact of lower DAP prices announced by Prime Minister in the recently shared Kissan Package. To recall, the Kissan Package offers DAP at a price of Rs11,250/bag, 18% lower than company’s price.

Management hopeful for a better quarter ahead

Fauji Fertilizer Bin Qasim Limited (FFBL), the largest and only DAP manufacturer in the country, enjoys a market of share of 54% in the segment, in addition to 8% market share in Urea. During 3QCY22, volumes remained dull due to floods and higher cost of fertilizers. Management, in its Corporate Briefing session held yesterday, however apprised its expectations of revival in sales volume for both Urea and DAP during 4QCY22. Phosphoric acid prices, key raw material for DAP, are also expected to come down as provisional rates have reduced from US$1,715/ton to US$1,200/ton. Lower raw material costs will likely assist in offsetting impact of lower DAP prices offered in the recent Kissan Package announced by the Prime Minister.

Furthermore, as per the management, the annual plant shutdown is expected in January 2023, coinciding with highest potential gas shortage. Gas supply is also expected to face disruptions in the month of December, however management has apprised it plans to manage the same through excess DAP inventory currently available.

3QCY22 recap – Higher costs drag earnings

In comparison to a profit of Rs 1.76/sh during the SPLY, FFBL reported a loss of Rs 1.31/sh in its 3QCY22 results. The lower-than-expected outcome was mostly caused by decreased volumetric sales and higher costs of production. Recall that the Finance Act of 2022 made input tax a component of cost and eliminated output tax on fertilisers. Additionally, this drove up production prices in 3QCY22. However, FFBL made an effort to offset the aforementioned effect by raising the price of urea during the preceding quarter, bringing the retail price to Rs. 2,250/bag (+Rs. 350/bag). Finance cost increased by 113%/32% in tandem with rising interest rates. Other income clocked in lower at Rs0.96bn due to lower than expected dividend income from subsidiaries.

Cumulatively, the company’s earnings for 9MCY22 clocked in at Rs1.71bn (EPS: Rs1.3), depicting a decline of 72%. The company faced an exchange loss of Rs4.8bn in 9MCY22. Additionally, the business incurred a hefty super tax charge totalling Rs2.7bn during the period.

Fauji Power skips dividend

The company relies on its subsidiary, Fauji Power Company Limited (FPCL) for most of its power needs. The reason for a significant increase in power costs during the outgoing quarter was mainly due to rise in global coal prices on back of geo-political tensions. FPCL’s power mix is mostly comprised of imported coal the prices of which had risen considerably during the period. The management shared that it has around 2 months of coal inventory at hand.

One reason for lower than expected earnings for FFBL’s 3QCY22 was also the absence of dividend from Fauji Power Company. Management apprised the subsidiary skipped dividend as it faced higher production costs and also plans to invest in the group’s food business.

Outlook

We maintain ‘Buy’ on FFBL with a Target Price of Rs27. Among key triggers are lower commodity prices and improvement in food and meat businesses. However, the higher prices of DAP, impact of floods and lost production due to gas shortages and plant turnaround in the Mar-2023 quarter is expected to keep stock prices in check in the near term.