AKD Securities Limited Equity Research – Daily Report (10-10-2019)

Karachi, October 10, 2019 (PPI-OT): Result Previews: EFERT and FFC

The board members of Engro Fertilizer Ltd (EFERT) are scheduled to meet on 18th Oct’2019 to announce 3QCY19 results. We expect EFERT to post 3QCY19 NPAT of PkR4.5bn (EPS: PKR3.36), down 12% YoY, but up 41% QoQ. The YoY decline in earnings is attributable to (i) 11/35% YoY lower Urea/DAP offtakes, (ii) 54% YoY higher finance cost amid policy rate hikes over the last year and, (iii) higher effective tax rate of 39% (vs. 25% in the same period last year) due to expected reversal of deferred tax booked in 3QCY18.

On a QoQ basis, the 41% increase in earnings will result from 907bps QoQ higher GMs led by higher urea retention price (effective Sep’19) to pass-on higher gas cost, while build-up in urea inventory is expected to provide further cushion. However, EFERT booked a gain on sale of land to EPCL in 2Q, the absence of which is expected to result in 64% QoQ lower ‘other income’, constraining bottomline growth. EFERT is also expected to announce a second interim cash dividend of PKR3.0/sh, taking 9MCY19 payout to PKR8.0/sh.

Fauji Fertilizer Company Ltd (FFC) is expected to witness a sequential decline in earnings due to 62/31% higher feed/fuel gas price effective 01st Jul’19. While FFC immediately increased urea retention price by PKR210/bag, it led to a disruption in urea offtake during the month. Overall, FFC’s urea offtake declined 7/6% YoY/QoQ in 3QCY19, as per provisional numbers. Disruption in volumes and pricing post the most recent gas price hike is expected to result in 11% QoQ lower 3QCY19 earnings of PKR4.65bn (EPS: PKR3.66). GMs are expected to witness a decline of 600 bps QoQ, outweighing the 9% increase in topline.

In addition to sequential decline on gross profits level, absence of dividend income from FFBL and AKBL is expected to drag ‘other income’ lower by 10% QoQ. On YoY basis as well, the earnings are expected to witness 25% decline on PBT levels, led by: (i) 300bps YoY lower GMs of 28% amid flattish topline, and (ii) 2.2x YoY higher finance cost. ‘Other income’ based on GIDC accrual and lower effective tax rate are expected to contain the dip in 3QCY19 earnings, resulting in 22% YoY higher NPAT. FFC is also expected to announce its third interim cash dividend of PkR3.2/sh, taking 9MCY19 payout to PKR8.55/sh.

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