AKD Securities Limited Equity Research – Daily Report

Karachi, November 08, 2018 (PPI-OT): Pakistan Fertilizer: Fundamentals remains strong

Demonstrating improved sector’s fundamentals, AKD Fertilizer Universe posted strong earnings growth of 73%YoY and 56%YoY in 3QCY18 and 9MCY18, respectively.

Impressive earnings performance by our Universe (3QCY18/9MCY18) emanates from: i) 12%/15%YoY jump in urea offtake, and ii) higher urea prices (+24%/13%YoY), and iii) consequent 7.5/5.4ppts recovery in primary margins (GMs) to 33.7%/31.9%, respectively.

In this regard, FFBL led the board with 7.4xYoY accretion in 3QCY18 earnings, followed by 82%YoY and 80%YoY growth in EFERT and FFC bottom-line respectively. At the same time, FATIMA posted a relatively lower earnings growth of 30%YoY in the latest quarter.

Going forward, we anticipate better results in the last quarter of CY18 on the back of: i) upward trend in local product prices, ii) higher offtake in Rabi season and 3) swift pass on of recent gas price hike.

In this backdrop, Fertilizer sector has gained 19.6%CYTD, outperforming the KSE-100 index by 17.3% during CY18. With this impressive run-up, we assert a Market-weight stance on the sector as positives are mostly incorporated into valuation, where EFERT (TP of PkR87.8/sh) remains our top pick on an appealing dividend yield of ~13% (total return 19%).