Karachi, February 11, 2022 (PPI-OT): EFERT: Highest ever PAT supported by one-offs
EFERT announced its CY21 EPS yesterday that clocked in at Rs15.8, up 16% YoY, which was higher than street estimates mainly due to one-offs in the last quarter related to the change in useful life of the asset, gain on trading portfolio and impact of registration of dealers.
The company continued with consistently high payouts versus the industry with a 104% payout ratio for CY21. EFERT declared a cumulative dividend of Rs16.5 during the year. Going forward, we expect the stock’s D/Y at ~12%.
Framework for a new fertilizer policy is being discussed, aiming to eliminate gas subsidy to the sector and deregulate the industry. This would pave way for a transition toward the weighted average cost of gas mechanism to curtail gas circular debt.
Highest ever profits backed by one-offs
EFERT posted an after-tax profit of Rs21.1bn (EPS of Rs15.8) during CY21 vis-a-vis PAT of Rs18.1bn (EPS of Rs13.6) in CY20, registering a growth of 16% YoY. The company showed an increase of 7ppts at the gross level in 4QCY21 on a QoQ basis mainly due to one-off impact of around Rs1.7bn of lower depreciation owing to a change in useful life assessment. Management apprised that the company ran its Enven plant at full capacity during the outgoing quarter compared to last quarter where the Enven plant was shut due to maintenance, this helped achieve gas efficiencies.
EFERT encouraged all its dealers to get registered in the last two years and now for the past several months has discontinued sales to unregistered dealers exceeding Rs100mn hence avoiding any charge due to disallowance of sales tax. The company also enjoyed substantial inventory gains during the last quarter on its trading business portfolio, such gains will likely be absent in the coming quarters.
Hope intact on concessionary gas arrangement extension
The management acknowledged that there has been a difference of opinion on the issue of concessionary gas expiry, management believes that since the company was not provided with the quantity of gas assured in the designated period the arrangement should extend until such quantity is availed. At present the company is accruing gas costs at regular Fertilizer policy rates on prudence basis. EFERT is in discussions with the GoP and SNGP on the matter and is confident of a favourable decision in light of previous ECC decisions.
In an event of a gas price hike, we believe the price increase by manufacturers would be more than the cost push as we believe fertiliser players have enough room to do so. EFERT would gain a higher benefit compared to FFC in such a scenario since ~70% of the Feed gas used by EFERT’s Base plant is charged at Petroleum Policy 2012 rates, hence the lower per bag price increase required.
A new fertiliser policy being considered
According to the proposed fertiliser policy, there would be no gas subsidy and industry would have a uniform rate. It is also being proposed to make the fertiliser industry de-regulated in essence. Domestic Urea prices are at c. 80% discount to international Urea prices, according to the proposed policy the industry would also be able to export any excess fertiliser.
The industry still faces the issue of pending Sales tax refunds to the tune of due to input-output tax differential. Subsidy receivables are another challenge for the industry and the total receivables due from government stand at Rs20bn out of which EFERT’s share is Rs6.5bn. On the issue of rising Gas Circular Debt, the management is of the view that decisions like weighted average cost of gas (WACOG) need to be taken. Any increase in gas prices is likely to be passed on by the industry.
Outlook for CY22
We believe pricing power for local urea producers is likely to remain strong during CY22, owing to expected low inventory levels in the first half of the year given prevailing demand supply dynamics. This would lead to stable revenue stream and margins leading us to maintain our Overweight stance intact on the Fertilizer sector. The sector’s cash rich position also directs at sustainable pay-outs for the future offering attractive D/Y of 12-13%. In light of improved farm economics, better support prices and focus of government on the agriculture sector it is evident that the fertilizer sector will continue to be of key importance.