Karachi, January 13, 2023 (PPI-OT): Fertilizer Preview: 4Q22 EPS up sequentially; CY22 down YoY

We present earnings estimates for FFC, EFERT and FFBL ahead of CY22 results where we expect the sector to report lower earnings YoY over higher tax charge and exchange loss on foreign payables.

For 4QCY22, we expect a sequential improvement in earnings. Furthermore, we expect both FFC and EFERT to announce dividends of Rs4.00/share, respectively alongside result announcements.

We maintain Overweight stance on the Fertilizer sector as the sector’s cash rich position directs at sustainable payouts. Our top picks are FFC and EFERT, offering an average D/Y of almost 19%.

Sequential improvement in 4QCY22 for fertilizer companies

We expect FFC, EFERT and FFBL to report a sequential improvement in profitability premised on stable to higher volumes, with improved margins in DAP sales. We also expect improved profitability over higher base of costs, as FFC and EFERT reported higher repair and maintenance charge during 3QCY22.

Cumulatively, CY22 profits for the sector are expected to decline over deteriorated 9MCY22 profits. To recall, the sector witnessed lower 9MCY22 earnings owing to higher taxes (Super Tax) and higher costs (plant shut downs). Alongside result, we expect dividend announcements from FFC and EFERT, where we expect FFBL to skip the final dividend.

Fauji Fertilizer Company Limited (FFC): FFC is estimated to witness a 2% YoY increase in earnings in 4QCY22 to Rs4.8/share (CY22E EPS: Rs16.5) primarily owing to better gross level performance. Earnings will show an improvement of 17% on a QoQ basis. Additional support is expected to come from other income due to dividend from PMP Morocco and higher income on deposits. FFC showed a 4% YoY decline in offtake during 4QCY22 as its plant was offline for turnaround for 20 days. We expect the company to announce a cash dividend of Rs4.0/share for 4QCY22, taking CY22 DPS to Rs13.0.

Engro Fertilizers (EFERT): EFERT’s consolidated earnings for 4QCY22 are projected at Rs3.4/share, a 26% YoY decrease due to lower dispatches. Finance cost for the quarter is expected to remain high given rising interest rates. Earnings are expected to improve sequentially due to better margins in the DAP segment.

EFERT’s Base plant, remained offline for turnaround for the most part of the outgoing quarter which was the reason for the company’s lower offtake during 4QCY22. The plant resumed operations on November 27, 2022 and started contributing during Dec-2022. To recall, the company’s Enven plant with a capacity of ~1.3mn tons had also tripped during late November which was then restored by 6th Dec-2022. We expect an interim cash dividend of Rs4.0/share in 4QCY22, which will take CY22 DPS to Rs12.5.

Fauji Fertilizer Bin Qasim (FFBL): The company is expected to post unconsolidated earnings of Rs1.9bn for 4QCY22, translating into an EPS of Rs1.5, compared to EPS of only Rs0.2 during the SPLY. We believe the company availed decent DAP margins amid better average retention prices and lower Phosphoric acid prices during the quarter. Any significant increase in Fuel and power costs like the previous quarter remains a key risk to gross level performance of the company.

Given the rising interest rate scenario and company’s 2-year high Short-term debt as at Sep-2022, we believe that finance costs would remain high for the quarter. We do not expect the company to post any dividend with the results.

FFC and EFERT among top picks

We continue to retain our Overweight stance on the Fertilizer sector as it is anticipated to report a steady revenue stream going forward whereas its cash rich position also directs at sustainable pay-outs for the future where FFC and EFERT offer a CY23 average D/Y of ~19%.

With gas price hikes on the cards, our base view is that any increase in gas prices would be likely passed on to the farmer by these companies over better demand-supply situation. Fertilizer companies under Fertilizer policy 2001 are currently charged Rs302/mmbtu for feedstock and Rs 1,023/mmbtu for fuel stock. The last gas price rise for the industry was announced in 2019 when Feed gas prices had jumped by 62% while fuel prices climbed by 31%.