Karachi, April 10, 2023 (PPI-OT): Fertilizer: Earnings for 1QCY23 to be a mixed bag

We present 1QCY23 earnings estimates for FFC, EFERT and FFBL where we expect companies to report a mixed bag of earnings trend. Lack of clarification over gas pricing for Mari network companies, leading to disorderly price increments during the period, is likely to result in different accounting treatments by companies.

Fertilizer companies, however, are expected to continue dividend announcements. We expect FFC and EFERT to announce a dividend of Rs3.2/share and Rs3.0/share, respectively.

We maintain our ‘Buy’ stance on the Fertilizer sector as its cash rich position directs at sustainable payouts in the long run, with FFC and EFERT offering an average D/Y of around 19%.

FFC – expected to stand out among peers

We present earnings estimates for FFC, EFERT and FFBL ahead of the Mar-2023 result announcements. While 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, lack of clarification over gas pricing for Mari network companies led to disorderly price increments during the period which will likely lead to different accounting treatments by companies.

We expect FFC to report noticeable augmentation in profitability, while EFERT is expected to report a decline in earnings over recording of gas costs at higher gas prices. On the other hand, FFBL is expected to report a loss in the first quarter over a likely exchange loss.

Company-wise previews

Fauji Fertilizer Company Limited (FFC): FFC is estimated to witness a 32% YoY increase in earnings in 1QCY23 to Rs6.5/share as we expect the company to book gas cost at old rates owing to lack of clarity over rates for Mari network companies as discussed above. Earnings will show an improvement of 59% on a QoQ basis. Our estimates include an expected tax reversal at half of Super Tax booked last year of around Rs 1.5bn (5% of CY21 PBT). Additional support is expected to come from an increase in other income over higher income on deposits. In a scenario where the company books gas cost at SNGPL network rates, our earnings estimate drops to Rs4.2/share. We conservatively expect the company to announce a cash dividend of Rs3.2/share for 1QCY23 to cover for the probable cash outflow in case of gas cost revision.

Engro Fertilizers (EFERT): EFERT’s consolidated earnings for 1QCY23 are projected at Rs2.8/share, a 33% YoY decrease. We expect the company to book gas cost at revised rates for the entire quarter as we believe the company follows SNGP network rates for payment of gas charges. Finance cost for the quarter is expected to remain high as well given rising interest rates. Earnings contribution on the DAP segment is also expected to decline sequentially due to lower offtakes.

To recall, EFERT’s Base plant was shut for a week amid technical issues during the month of March. The company increased Urea prices at the last day of 1QCY23, around a month and a half after the gas rates were increased by the government and hence would have to take a hit on earnings. We expect an interim cash dividend of Rs3.0/share in 1QCY23.

Fauji Fertilizer Bin Qasim (FFBL): The company is expected to post a loss of Rs3.8bn for 1QCY23, translating into LPS of Rs2.9, compared to EPS of Rs1.3 during the SPLY. Even though the company passed on the impact of gas pricing timely and also had lower Phosphoric acid prices during the quarter, an expected exchange loss of around Rs3.0bn is likely to cause the company to post a loss. Any significant increase in fuel and power costs like the previous quarter remains a key risk to gross level performance of the company.

Given the rising interest rate scenario and a rise in company’s long-term debt coupled with 2-year high short-term debt as at CY22 end, we believe that finance costs would remain high for the quarter. We do not expect the company to post any dividend with the results.

Long term stance on the sector remains intact

We reiterate our positive stance on the sector as it is anticipated to continue to broadly report a steady revenue stream in the future. The sector’s cash-rich position also points toward sustainable pay-outs going forward, with FFC and EFERT offering a CY23 average D/Y of about 19%.