IGI Securities Limited - Day Break (29-07-2021)

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IGI Securities Limited – Day Break (29-07-2021)

July 29, 2021

Karachi, July 29, 2021 (PPI-OT): Fertilizer: Rising Margins and lower Financial charges to drive earnings performance

We preview earnings for 21Cy21, for our coverage fertilizer companies FFC, FFBL and EFERT. We expect a combined profitability for 2qCy21 of PKR 10.9bn in against PKR 7.6bn in the same period last year, translating into a growth of +45%y/y.

FFC expected earnings for 2qCY21 at PKR 3.7/share and payout of PKR 2.75/share.

EFERT expected earnings for 2qCY21 at PKR 3.4/share and payout of PKR 3.0/share.

FFBL expected earnings for 2qCY21 at PKR 1.4/share and no payout.

Rising Margins to Prop Fertilizer Sector Profitability

The fertilizer sector (FFC, FFBL and EFERT) is expected to post net profit of PKR 10.9bn in 2QCY21 against PKR 7.6bn in the same period last year, translating into a growth of +45%y/y. This is primarily driven by i) higher Urea and DAP prices ii) Reduction in financial charges owing to 625bps cut in policy rates since Mar’20.

Company wise we expect FFC to lead the growth chart with projected earnings of at PKR 4.8bn or PKR 3.7/share, followed by EFFERT with a profitability of PKR 4.5bn or PKR 3.39/share while, FFBL is expected to contribute PKR 1.7bn or PKR 1.37/share within the sector’s profitability.

Fauji Fertilizer Company Limited (FFC)

FFC is expected to amass earnings of PKR 4.8bn or PKR 3.7/share for 2QCY21 compared to PKR 4.82bn or PKR 3.83/share in same period last year, down by -3%y/y (19%q/q) This takes cumulative earnings for 1HCY21 to PKR 10.5bn or PKR 8.3/share compared to PKR 8.3bn or PKR 6.6/share last year same period.

Moreover, we expect a cash dividend of PKR 2.75/share taking total dividend payout to PKR 6.25 for 1HCY21.

The decline in profitability is attributable to 19%y/y (-3%q/q) decline in urea offtakes; 556kT compared to 684kT last year and 575kT previous qtr. On a sequential basis, profitability is expected to contract by -19%q/q.

Engro Fertilizers Limited (EFERT)

EFERT’s earnings are expected to post a growth of 17%y/y to arrive at PKR 4.5bn or PKR 3.39/share during 2QCY21. This takes cumulative earnings for 1HCY21 to PKR 10.2bn or PKR 7.69/share as compared to earnings of PKR 4.4bn or PKR 3.34/share in same period last year.

The company is expected to announce an interim cash dividend of PKR 3/share taking total dividend payout to PKR 6/share for 1HCY20.

Despite a reduction in DAP offtakes by 49%y/y (high base effect) in 2QCY21 owing to high base effect, the rise in DAP margins is expected to offset this the impact of this reduction alongside a decrease in financial charges by 67%y/y, increasing gross margins by 2ppts y/y to arrive at 37%.

However, on a sequential basis, earnings are expected to undergo a decline of -21%q/q owing to a q/q decline in Urea offtakes owing to seasonal factors.

Fauji Fertilizer Bin Qasim Limited (FFBL) – Rising DAP margins to continue to buttress profitability:

We anticipate the company to register a profit of PKR 1.7bn or PKR 1.37/share in 2QCY21 as compared to a loss of PKR 3.04bn or 2.36/share during 1QCY20. This takes cumulative earnings for 2HCY21 to PKR 3.03bn or PKR 2.35/share as compared to a loss of PKR 4.2bn or PKR 3.26/share in same period last year. We do not expect any pay-out from the company.

The company’s bottom line remains on an upward trajectory as a result of higher DAP margins as domestic DAP prices have risen by ~ 43% 4QCY20 onwards in view of the tight situation surrounding global demand and supply of DAP. Consequently, on a yearly basis the company’s gross margins are expected to register an increase of 10ppts to arrive at 23%.

Furthermore, the debt leveraged company continues to receive respite by way of lower interest rate of 7% after slashing of 625bps whereby we expect strain of finance charges on profitability to be lessened by 46%y/y.