Karachi, July 15, 2021 (PPI-OT): Fertilizers: Improved margins in 2QCY21E across the board
Urea offtake for the 2QCY21 is expected to clock in at ~1.5mn tons vs. a higher base of 1.65mn tons in the corresponding period of last year, reporting a decline of 9% YoY. To recall, dealers awaited clarification on subsidy offered on Urea during 2QCY20, which led to delayed offtake falling in the month of Jun-2020. DAP offtake for the quarter is expected to clock in at ~0.3mn tons vs. 0.4mn tons in SPLY depicting a 25% YoY dip. Much of DAP for the season was bought in the previous quarter as there were expectations of a rise in DAP prices owing to restricted supply globally. For the month of Jun-2021, Fauji Fertilizer (FFC) is expected to post sales volume of 248k tons followed by Engro Fertilizers (EFERT)’s estimated offtake of 250k tons while Fauji Fertilizer Bin Qasim‘s (FFBL) offtake is expected at 52k tons.

Result Previews

Fauji Fertilizer Company Limited (FFC):

FFC is estimated to witness an 11% decline in earnings on a year over year basis. We project the unconsolidated EPS to clock in at Rs3.5 for the second quarter, the decrease is primarily attributable to lower Urea off-take (-19% YoY). Gross margins are projected at 36%, a 4.3ppt YoY increase. We expect the company to announce second interim cash dividend of Rs2.7/share, taking cumulative payout to Rs6.1/share for 1HCY21.

Engro Fertilizers (EFERT):

EFERT’s consolidated earnings are projected to post a 24% YoY increase, with an EPS of Rs3.6 for 2QCY21. This is primarily led by improvement in the gross level performance and reduction in finance costs. Along with the result, we expect EFERT to announce second interim cash dividend of Rs3.5/share, taking total payout to Rs7.5/share for 1HCY21.

Fauji Fertilizer Bin Qasim (FFBL):

The company’s profitability is expected to remain in green for the 2QCY21 as well, where we anticipate the company to post unconsolidated earnings of Rs1,833mn, translating into an EPS of Rs1.5 as against a loss of Rs1,160mn (LPS: Rs0.9) in 2QCY20. Improvement in profitability is expected because of a whopping 63% YoY increase in local DAP prices (in-line with rising global DAP prices) and lower financial charges. We do not anticipate any dividend payout alongside results of 2QCY21.

Going forward, we believe FFC has the most capital upside potential from current levels, followed by FFBL. On the other hand we see EFERT as being fairly valued at present levels. EFERT will most likely be booking gas cost for Enven plant at regular rates on prudence basis from 3Q and onwards (incorporated in our base case), which is expected to hurt its future earnings. Even if prices are increased by the industry to pass on the impact, FFC will likely enjoy a higher benefit.