JS Securities Limited - JS Research (October 05, 2022)

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JS Securities Limited – JS Research (October 05, 2022)

October 5, 2022

Karachi, October 05, 2022 (PPI-OT): Fertilizers: Profitability to improve sequentially in 3QCY22

The higher prices are expected to outweigh decline in offtake for the quarter, which is expected to witness a decline of ~13% YoY in Urea and an even more significant drop of 77% in DAP in 3QCY22. This was due to lower demand coupled with production halts by FFC and EFERT during the quarter.

Furthermore, we expect FFC and EFERT to announce a dividend of Rs2.50/share and Rs3.75/share, respectively alongside 3QCY22 result announcements.

Margin expansion for all fertilizer companies

We present 3QCY22 earnings estimates for FFC, EFERT and FFBL ahead of result announcements where we expect fertilizer companies to report an increase in gross level performance on a YoY basis over better retention prices following price adjustments post budgetary measures announced in Jun-2022. Earnings are also expected to report higher on a sequential basis over one-time 10% Super tax charge in 2QCY22 based on CY21 income.

Fauji Fertilizer Company Limited (FFC): FFC is estimated to witness a 35% YoY decline in earnings in 3QCY22 to Rs3.30/share (9MCY22E EPS: Rs10.85) owing to higher finance and tax expenses and one-off repair and maintenance charge. Earnings are however expected to report a noticeable improvement of 25% on a QoQ basis mainly due to absence of 10% Super Tax during the outgoing quarter.

We do not rule out additional support from higher other income due to dividend from Wind power plants, however we do not incorporate it in our estimates. Moreover, we also expect higher income on deposits in the ongoing higher rates environment. We expect the company to announce a cash dividend of Rs2.50/share for 3QCY22, taking 9MCY22 DPS to Rs8.30.

Engro Fertilizers (EFERT): EFERT’s consolidated earnings for 3QCY22 are projected at Rs3.53/share, a 7% YoY increase. Earnings are expected to increase despite 55% YoY higher finance costs estimated during the quarter as we expect gross margins to improve by 3.9ppt YoY to 30%.

Earnings are expected to improve sequentially due to lower base of 2QCY22 set by the one-time 10% Super Tax charge. Moreover, the company had booked higher other expenses in 2QCY22 owing to exchange loss on DAP shipments to the tune of Rs700mn which may not be the case in 3QCY22 over immaterial imports in 3Q.

After skipping dividend in 2QCY22 due to loss in the quarter, we expect cash dividends to resume from 3Q where we expect an interim cash dividend of Rs3.75/share in 3QCY22, which will take 9MCY22 DPS to Rs9.25.

Fauji Fertilizer Bin Qasim (FFBL): The company is expected to post unconsolidated earnings of Rs2.4bn for 3QCY22, translating into an EPS of Rs1.84, up 4% YoY. Key reasons for a better expected bottom-line are sustained DAP margins amid price hikes and dividend income from Fauji Power Company. The company is also likely to book an exchange loss during 3QCY22 on Phosphoric acid payables over PKR depreciation against US$ of 11%. We do not expect the company to post any dividend with the results.

Sep-2022: Urea off-take to improve 4% YoY

As per latest provisional data, Urea sales in Sep-2022 are expected to clock in at 508k tons, up by 4% YoY. For the month of Sep-2022, Fauji Fertilizer (FFC) and Engro Fertilizer Ltd (EFERT) are expected to post Urea sales volume of 190k tons and 164k tons, respectively. Fauji Fertilizer Bin Qasim‘s (FFBL) off-take is expected at 47k tons. This would take the cumulative 9MCY22 offtake to 4.7mn tons, 2% higher compared to SPLY.

DAP off-take for Sep-2022 is expected to clock in at ~48k tons depicting a 78% YoY decrease. FFBL, sole manufacturer of the product, is expected to post offtake of 22k tons during Sep-2022. FFC and EFERT on the other hand, are expected to post DAP sales volume of only 2k tons and 19k tons during the same period, respectively. Offtake for 9MCY22 is expected to clock in at 725k tons, a 40% YoY drop.