Karachi, April 14, 2022 (PPI-OT): Fertilizers: Improved profitability expected in 1QCY22

We present earnings estimates for FFC, EFERT and FFBL ahead of the Mar-2022 result announcements where we expect Fauji companies to report improvement in profitability, while EFERT is expected to report a decline in earnings over higher gas prices.

Furthermore, we expect FFC and EFERT to announce a dividend of Rs3.75/share and Rs3.50/share, respectively alongside its result announcements.

We have an Overweight stance on the Fertilizer sector due to its stable revenue stream and attractive dividend yield of 12%, where FFC remains our Top Pick from the sector.

Expanding revenue for all fertilizer companies

We present earnings estimates for FFC, EFERT and FFBL ahead of the Mar-2022 result announcements where we expect Fauji companies to report improvement in profitability, while EFERT is expected to report a decline in earnings over higher gas prices. All three companies are expected to report a significant jump in Revenue on a year over year basis due to an increase in fertilizer prices compared to SPLY.

Fauji Fertilizer Company Limited (FFC): FFC is estimated to witness a 3% increase in earnings in 1QCY22 on a year over year basis mainly due to higher volumetric sales and better retention prices. We project the unconsolidated EPS to clock in at Rs4.70 for the first quarter. We expect higher financial charges due to higher outstanding debt and interest cost. Other income on the other hand is also expected to be higher due to dividend of Rs 1.1bn from the recently acquired Wind I and Wind II projects. We expect the company to announce a cash dividend of Rs3.75/share for 1QCY22.

Engro Fertilizers (EFERT): EFERT’s consolidated earnings for 1QCY22 are projected at EPS of Rs3.60, a 28% YoY decline primarily due to the company accruing gas costs at regular Fertilizer policy rates on prudence basis from the last three quarters. The company has historically not announced any dividend in the first quarter except for last year but we believe an interim cash dividend of Rs3.50/share is likely in 1QCY22.

Fauji Fertilizer Bin Qasim (FFBL): The company’s profitability for 1QCY22 is expected to be different from historical performance, where we anticipate the company to post unconsolidated earnings of Rs2.3bn, translating into an EPS of Rs1.8 as against a profit of only Rs1.3bn (EPS: Rs0.98) in 1QCY21. Improvement in profitability is expected mainly because of a ~2x YoY increase in local DAP prices (in-line with rising global DAP prices). We do not expect the company to post any dividend in the first quarter.

Attractive Dividend Yield and strong pricing power

We have an Overweight stance on the Fertilizer sector due to its stable revenue stream and attractive dividend yield. We believe that in the event of any gas price increment, local urea players would easily pass on the negative impact of the hike and may also increase prices of fertilizer over and above the cost impact as they have enough room to do so, also evident from the ~80% discount to international prices. We rank FFC as our top pick as the company offers highest total return (~32%) from current levels.

On the other hand, we see EFERT as having limited capital upside at present levels. The company is in discussions with the GoP and SNGP on the matter and looks forward to a favourable decision in light of previous ECC decisions. Any positive news on this front would be an upside trigger to our base case investment thesis.