JS Securities Limited – JS Research (January 13, 2022)

Karachi, January 13, 2022 (PPI-OT): Fertilizers: Improved profitability in CY21E

We present earnings estimates for FFC, EFERT and FFBL ahead of the Dec-2021 result announcements where we expect improved profitability in CY21 on a YoY basis for the sector as a result of better pricing of both Urea and DAP.

Furthermore, we expect FFC and EFERT to announce a dividend of Rs4.0/share and Rs3.5/share, respectively while FFBL to announce a dividend of Rs2.0/share alongside its result announcements.

We have an Overweight stance on the Fertilizer sector due to its stable revenue stream and attractive dividend yield of 11%, where FFC remains our Top Pick from the sector.

Fauji Fertilizer Company Limited (FFC): FFC is estimated to witness a 5% decline in earnings in 4QCY21 on a year over year basis. Despite 7ppt YoY higher gross margins (4Q: 36%), lower earnings are expected due to higher finance costs. We project the unconsolidated EPS to clock in at Rs5.2 for the fourth quarter taking the full year EPS to Rs17.7. We expect the company to announce a cash dividend of Rs4.0/share, taking cumulative payout to Rs13.8/share for CY21.

Engro Fertilizers (EFERT): EFERT’s consolidated earnings for 4QCY21 are projected at EPS of Rs3.3, a 33% YoY decline primarily due to the company accruing gas costs at regular Fertilizer policy rates on prudence basis from the last two quarters. Total EPS for CY21 is expected to come around Rs14.5, a 7% YoY increment. Along with the result, we expect EFERT to announce a final cash dividend of Rs3.5/share, taking total payout to Rs15/share for CY21.

Fauji Fertilizer Bin Qasim (FFBL): The company’s profitability for CY21 is expected to be entirely different from recent years, where we anticipate the company to post unconsolidated earnings of Rs4,357mn, translating into an EPS of Rs3.4 as against a profit of only Rs3,097mn (EPS: Rs3.09) in CY20 which also included a temporary accounting gain amounting Rs2.7bn (Rs 2.1/share) on extinguishment and re-measurement of GIDC liability as per the IFRS. Improvement in profitability is expected because of a ~2x YoY increase in local DAP prices (in-line with rising global DAP prices) and lower financial charges. We do anticipate a dividend payout as well alongside results of 4QCY21 up to Rs2/share. PMP has also shown improved profitability, the JV’s share of profit in 9MCY21 was Rs1.4bn compared to only Rs242mn in the SPLY. Any higher than expected dividend pay-out from PMP is an upside to our estimates.

Attractive Dividend Yield and strong Pricing power

We have an Overweight stance on the Fertilizer sector due to its stable revenue stream and attractive dividend yield. The inventory balance for Urea at CY21 is expected to touch an all-time low since CY08, which further adds weight to our view. We believe that in the event of any gas price increment, local urea players would easily pass on the negative impact of the hike and may also increase prices of fertilizer over and above the cost impact as they have enough room to do so. We rank FFC as our top pick as we the company offers highest total return (46%) from current levels.

On the other hand, we see EFERT as being fairly valued at present levels. The company is in discussions with the GoP and SNGP on the matter and looks forward to a favourable decision in light of previous ECC decisions. Any positive news on this front would be an upside trigger to our base case investment thesis.

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