Elixir Securities Limited – Elixir Insight

Karachi, April 13, 2018 (PPI-OT): Pakistan Fertilizer Sector – Earnings to Rise on Higher Urea Sales

EFERT is expected to declare PKR2.44 EPS in 1Q2018, up 97%YoY due to 85% higher urea sales and slightly higher pricing power due to lower inventory levels.

FFC is expected to declare PKR1.86 EPS in 1Q2018, up 7.7%YoY. The increase in earnings is low despite an 88% increase in gross profit due to a 42% expected decline in Other Income. Gross profit should be higher due to higher urea and DAP sales while Other Income would be low due to nil dividend payouts by AKBL and FCCL.

EFERT’s 1Q2018 EPS expected at PKR2.44: We expect Engro Fertilizers (EFERT) to declare standalone 1Q2018 EPS of PKR2.44, up 96.6%YoY. The increase in earnings is primarily due to a 76.9%YoY jump in gross profit – driven by higher urea sales and partly by pricing.

On the volumes front, we expect EFERT to sell 497KTons of urea locally in 1Q2018, compared to 269KTons sold in 1Q2017, an 84.9%YoY jump. These volumes are significantly above the last 5 year average for the first quarter at 295Ktons. The increase in volumes is due to piling up of inventories by dealers, in anticipation of shortages for the upcoming sowing season and possibility of price increases. Higher sales are an industry wide event, with sales for 1Q2018 higher than the preceding 5 year average by 53%.

On the pricing front, due to high inventory levels of 1,400Ktons in Mar-17, gross margins were under pressure due to discounts being offered to clear the inventory levels. Currently Feb-18 urea stock stands at 272Ktons with an estimated 390Ktons stock by Mar-18, due to which discounts are not on offer, raising gross margins. Resultantly EFERT’s gross profit margin is expected at 43.2% in 1Q2018 compared to 34.7% in 1Q2017.

FFC’s 1Q2018 EPS expected at PKR1.86: We expect Fauji Fertilizer Company (FFC) to declare 1Q2018 EPS of PKR1.86, up 7.7%YoY. The increase is due to 87.9%YoY expected jump in gross profit which is partly set off by 24.1%YoY higher distribution expenses and 42.1%YoY lower other income.

The increase in gross profit is mainly due to a 52.2%YoY jump in urea sales to 573Ktons. DAP volumes are also expected to jump to 144Ktons (volumes for Jan-Feb 2018 are already 108Ktons), an increase of 231%. Similar to EFERT, gross profit is also supported by the elimination of discounts due to substantial decrease in industry urea inventory levels between Mar-17 and Mar-18.

Despite the stellar core performance, earnings are projected to be only up 7.7%YoY in 1Q2018 due to a 42.1% drop in other income. The drop in other income is due to 1) Lower subsidy income due to changes in the budget, 2) Nil dividend received from Askari Bank (AKBL) compared to PKR1.5/share in 1Q2017, 3) Nil dividend received from Fauji Cement Company (FCCL) compared to PKR1/share in 1Q2017. We expect FFC’s dividend payout to remain flat YoY in 1Q2018 at PKR1.5/share.