Karachi, October 18, 2021 (PPI-OT): Fertilizer: A case for FFBL
Fauji Fertilizer Bin Qasim Limited (FFBL) has been able to enjoy better primary margins this year and has shown strong core business performance, where in light of the recent regional developments we expect it to continue for the rest of the year. We anticipate the company to post a 5ppt YoY increase in gross margins in the upcoming 3QCY21 result, primarily due to higher retention prices, leading to unconsolidated earnings of Rs5,860mn (EPS of Rs4.54, +77% YoY).
With the arrival of Rabi season, demand for DAP has risen and most countries are facing serious shortage of the product. On top of that, China which is a major Dap exporter, has reportedly decided to enforce customs inspections on phosphate fertilizer cargoes from Friday where this move is expected to magnify the issue and further impact DAP shipments. On the regional front, Indian government has increased subsidies on DAP by 2.4x to INR1,200/bag from INR500/bag announced previously, in light of the rising global prices. The GoP on the other hand hasn’t been able to finalize a mechanism of the subsidy on DAP announced last year while DAP retail prices in the local market have reached ~Rs7,000/bag. DAP off-takes in the upcoming Rabi season may be impacted to some extent if any announcement on subsidy is not made by the government in the coming days. According to latest data, International DAP suppliers are offering the product at US$750/ton CFR (landed cost: ~Rs6,925/bag) to Pakistan.
With DAP prices at all-time high levels, the sole manufacturer of the product in Pakistan, FFBL, will benefit the most from the said development as it will be selling majority of its production at higher rates in the coming quarter. FFBL has been able to enjoy better primary margins recently and has shown strong core business performance, this is expected to continue for the rest of the year. The company has healthy primary margins of ~$215/ton at the moment despite higher phos prices and rupee devaluation. Company’s consolidated performance has also improved of late. Its subsidiary FFL has a positive EBITDA now and has been showing gross profit for the last four quarters, thanks to the new management. FFBL is now focused on improving the group level performance and get rid of loss making businesses, the proceeds from sale of Foundation Wind Energy I and II will also provide a breather to the company’s cash position (EPS impact Rs1.8/share). Our SoTP based target price for the stock comes at Rs35/share.
3QCY21 earnings preview
The board of FFBL is scheduled to meet on 25th October, 2021 to discuss its 3QCY21 financial result. Where we anticipate the company to post unconsolidated earnings of Rs5,860mn, translating into an EPS of Rs4.54 as against a profit of Rs3,306mn (EPS: Rs2.56) in the 3QCY20. Improvement in profitability is expected because of a whopping ~65% YoY increase in local DAP prices, in-line with rising global DAP prices, lower financial charges and a one-off gain from the sale of its Wind projects. We do not anticipate any dividend payout alongside the 3QCY21results.