JS Securities Limited – Morning Briefing

Karachi, August 09, 2018 (PPI-OT): EFERT: EPS expected to grow by 10% YoY to Rs2.01 in 2Q2018

The Board of Directors of Engro Fertilizers Limited (EFERT) is scheduled to meet on August 10, 2018 to discuss its 1H2018 financial results.

We expect EFERT to announce earnings of Rs2.01/share for 2Q2018, up by 10% YoY, primarily due to higher retention prices in Urea and DAP segments and lower financial costs.

Along with the financial results, we expect EFERT to announce an interim dividend of Rs2.25/share.

Cumulatively, earnings of the company are expected to clock in at Rs6.5bn (EPS: Rs4.92); up by a healthy 61%YoY as compared to Rs4.0bn (EPS: Rs3.06) in the corresponding period last year.

We believe local manufacturers are at a sweet spot owing to restricted supply and high demand scenario dynamics where as per our channel checks, inventory levels in the month of July are expected to close at 177k tons.

Key risks to our thesis include 1) more than expected increase in gas prices, (2) significant imports in order to maintain strategic levels of inventory.

2Q2018 EPS likely to clock-in at Rs2.01; up by 10% YoY

The Board of Directors of Engro Fertilizers Limited (EFERT) is scheduled to meet on August 10, 2018 to discuss its 1H2018 financial results. We expect the company to post profit after tax of Rs2.7bn (EPS: Rs2.01) during 2Q2018 as compared to Rs2.4bn (EPS: Rs1.83); reflecting a growth of 10% YoY. Cumulatively earnings of the company are expected to clock in at Rs6.5bn (EPS: Rs4.92); up by healthy 61%YoY as compared to Rs4.0bn (EPS: Rs3.06) in the corresponding period last year. Along with the financial result, we expect EFERT to announce an interim dividend of Rs2.25/share.

Sturdy Prices and healthy margins to support earnings

During 2Q2018, revenues are expected to grow by 30%YoY to Rs22.2bn as compared to Rs17.2bn in the same period last year. Despite volumes of urea segment declining by 10%YoY to 497k tons, the expected accretion in revenue is primarily on the back of hike in retention prices in both Urea and DAP segments by 13% YoY and 51% YoY to Rs1,460/bag (Retail peaked: Rs1,517/bag) and Rs3,100/bag (Retail peaked: Rs3,621/bag), respectively. For the former, prices essentially augmented due to abolishment of cash subsidy in the recent budget, while for latter (1) adjustment of subsidy through sales tax, (2) currency depreciation, and (3) surge in international prices were the primary factors. Consequently, GP margins are expected to grow by 3ppts YoY to 33% as compared to 30% in the same period last year. Other Income is expected to decline by 78% YoY owing to lower realization of cash subsidy (Urea subsidy was recorded till mid of May-2018), while Finance cost, is expected to decline by 22% YoY due to swift deleveraging. We expect the company to record total tax expense of Rs2.1bn taking effective tax rate to 44% (vs 42% in 2Q2017) owing to materialization of super tax.

Current dynamics continue to prefer local manufacturers

Amid low inventory situation in upcoming high demand season along with lower probability of importing urea due to (1) worsening CA deficit and (2) unviable cost of Rs ~2,000/bag; we believe local fertilizer manufacturers are currently placed at a sweet spot. Furthermore, we believe that any decision regarding supply of LNG at low cost to other manufacturers may not significantly hamper current supply demand situation. On the inventory front, our channel checks suggest an attrition of 86% YoY in the month of July-2018 to clock in at ~177K tons. Key risks to our thesis include (1) more than expected increase in gas prices, (2) significant imports in order to maintain strategic levels of inventory.