Karachi, July 15, 2022 (PPI-OT): Fertilizers: Higher taxes to trim 2QCY22E profitability
We present earnings estimates for FFC, EFERT and FFBL ahead of 2QCY22 result announcements where we expect the sector to report a decline in earnings over higher tax charge.
Furthermore, we expect FFC and EFERT to announce a dividend of Rs1.75/share and Rs2.00/share, respectively alongside its result announcements.
Despite the likely increase in gas prices, we expect the Fertilizer sector to continue reporting stable revenue and income stream, maintaining a dividend yield of 12%, where FFC remains our top Pick from the sector.
Super tax to dent fertilizer companies’ profitability
We present earnings estimates for FFC, EFERT and FFBL ahead of the 2QCY22 result announcements. We expect the three companies to report a prominent decline in profitability due to the imposition of Super tax, despite higher fertilizer prices and stable offtake enjoyed during the quarter. To recall, the sector has been charged with 10% Super Tax on its CY21 income, alongside a 4% Super Tax on income CY22 onwards in Federal Budget FY23, resulting in a one-time higher tax charge in 2QCY22.
Fauji Fertilizer Company Limited (FFC): FFC is estimated to witness a 21% YoY/54% QoQ decline in earnings in 2QCY22 to Rs2.24/share (1HCY22 EPS: Rs7.14), mainly due to higher finance cost and tax charge. We expect some support from 2x YoY higher other income (Rs2.8bn) due to dividend from PMP Morocco and higher income on deposits. We expect the company to announce a cash dividend of Rs1.75/share for 2QCY22, taking 1HCY22 DPS to Rs5.45.
Engro Fertilizers (EFERT): EFERT’s consolidated earnings for 2QCY22 are projected at Rs1.20/share, a 66% YoY decline primarily due to the super tax charge. Finance cost for the quarter is also expected to remain high given rising interest rates. We believe an interim cash dividend of Rs2.00/share is likely in 2QCY22, which will take 1HCY22 DPS to Rs7.50.
Fauji Fertilizer Bin Qasim (FFBL): The company is expected to post unconsolidated earnings of Rs1.6bn for 2QCY22, translating into an EPS of Rs1.24, down 39% YoY. Key reasons for a lower income are higher tax charge and absence of dividend from Fauji Power Company. Core profitability is expected to improve despite a rise in Phosphoric acid prices during the quarter. The company is also likely to book an exchange loss during 2QCY22 on Phosphoric acid payables over sharp PKR depreciation against US$ of 10% in 2Q. We do not expect the company to post any dividend with the results.
Stable income stream expected despite higher gas prices
A gas price hike of 42% for Feed gas (Rs128/bag) and 82% for Fuel gas (Rs834/bag), has been proposed for the fertilizer sector. We share our working on per bag impact of the same.
It is expected that any increase in gas prices is likely to be passed on by the industry to end consumer. A key factor here would be the manufacturers’ ability to pass on cost pressures, given government’s recent pushback on urea prices.
We expect the Fertilizer sector to continue to report stable revenue and income stream, maintaining a dividend yield of 12%, where FFC remains our Top Pick from the sector.