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Companies policy matters and reports in focus

The takeaways from Hub Power Company (HUBC) briefing narrate some interesting stories. A MoU execution committee has been formed by the government in which three members from IPPs will represent the sector. As regards excess payment to IPPs, the management said, numbers will be reconciled again and will be vetted against power purchase agreement. HUBC base plant is not part of 1994 policy power policy. However, the Company has negotiated its own terms, which are also communicated to investors through a separate notice to Pakistan Stock Exchange. There will be no termination of existing plants unless management agrees voluntarily. The dispatch from base plant is likely to continue in winter season when hydel potential is low. As regards the backlog of receivables, the committee will finalize the plan over the next two weeks which will be presented to the Prime Minister. The MoU will be valid for a maximum of six months. HUBC has advised the government to launch a new instrument to clear outstanding amount. To highlight, Ministry of Energy has also requested Ministry of Finance to work on launch of new instrument. The total overdue receivables of HUBC are Rs89 billion, which includes Rs65 billion on base plant, Narowal (Rs19 billion) and Laraib (Rs5 billion).

Discussions are ongoing on CPEC projects, focus will be on extending overall tenor of the loan. The tariff structure of base plant will continue as U shape. However, dollar indexation will be removed as part of the agreement. China Power Hub Generation Company (CPHGC) is expected to start paying dividend from next June. The overdue receivables for CPHGC are reported at Rs25 billion after the Company received Rs8.5 billion from Energy Sukuk 2.

Takeaways from Fauji Fertilizer Bin Qasim (FFBL) analysts briefing are also worth reading for the investors. Global DAP prices and margins have improved in July 2020 and the management believes the rising trend is likely to continue. As regarding Gas Infrastructure Development Cess (GIDC) decision of the Supreme Court, the Company will go for a review petition. FFBL has to pay around Rs22 billion on account of the Cess. The Company has provided for the Cess thus no impact on accounting earnings. Furthermore, the management believes that its GIDC case is different from rest of the fertilizer industry as they have not collected GIDC from consumers, especially on DAP business. In case the Company is required to pay GIDC, it will ask the government to set off its outstanding dues, which includes sales tax, subsidy receivable and income tax adjustment with GIDC. The management believes GIDC should not be charged on new plants as the government has contracted with them not to charge any tax on new investment for 10 years. Currently, the Company is in the process of rescheduling its long term loans. The details will be shared once the process is completed. The consumer segment has grown in last few months amid COVID-19 and the management believes this segment has potential to grow further. Thus, Fauji Food Limited (FFL) will also depict significant improvement in terms of profitability in near future. To note, they mentioned that margins have also improved. Regarding sales tax input adjustment, talks are ongoing with the government to resolve the issue. If they fail to reach an agreement, the Company will increase prices to pass on the impact. In a notice to PSX, the Company has informed that the BoD has recommend to increase authorized capital by Rs4 billion. The receipts from any subsequent raise in issued capital will be used for multiple purposes.


Mari Petroleum (MARI) has reported earnings of Rs53.1/share for 4QFY20, registering a decline of 6%YoY. The Company also declared a final cash dividend of Rs2.0/share, taking full year payout to Rs6.1/share. Decline in earnings is attributable to: 1) decline in oil and gas flows by 10%YoY and 1%YoY respectively and 2) increase in exploration costs by 429%YoY. Exploration costs were higher than expected. The Company has recorded a dry well Zarbab (Hala Block), where company has a 35% stake. Last quarter, PPL recorded this as a dry well under its exploration cost. Operating expenses were reported at Rs3.5 billion (or US$1.8/bbl), which is broadly same as last quarter’s US$1.84/ bbl. Finance income increased by 50%YoY due to increase in overall cash position of the Company. During FY20, earnings of the company increased by 25%YoY due to PKR depreciation of 17% which resulted in higher wellhead prices. Overall oil and gas production of the company declined by 8%YoY and 2%YoY respectively during the year.

As per data released by the NFDC, urea offtake for July 2020 declined 51%MoM but increased 24%YoY to 574,000 tons. The sequential decline in offtake was as a result of high base effect. The farmers had delayed their purchase decision in May 2020 in anticipation of subsidy on urea. In addition, budgetary announcements included punitive action for selling urea to unregistered dealers which resulted in pre-buying in June 2020.

On YoY basis, the increase in price by manufacturers was witnessed across the board, except for FFC (urea offtake down 37%YoY). EFERT led the pack, accounting for approximately 60% of urea offtake during the month. With EFERT’s inventory having normalized to approximately 120,000 tons after hitting a high of 600,000 tons during the year, the company was quick to increase urea price by Rs25/bag in early August 2020, to make up for a comparatively higher decline of Rs400/bag in urea price as compared to Rs160/bag cost reduction benefit post GIDC elimination.

The price hike may result in normalization of EFERT’s offtake in coming months. On cumulative basis, the urea offtake remained flattish YoY at 3.2 million tons for 7MCY20. Dismal offtake in the month of July 2020 has made FFC to lag on cumulative basis, whereas FATIMA and FFBL led the pack.

After the recent GIDC decision by the Supreme Court, FFC / EFERT / FATIMA / FFBL may be able to pay approximately 70/ 45 /30 / 20 percent overdue GIDC payables through existing short term investments and cash flow. Analysts highlight FFC as the top pick in Fertilizer sector due to: 1) best liquidity situation as aforementioned and 2) healthy EBITDA generation, which will enable the company to sustain its dividend yield. Worst affected players include FFBL, with food subsidiaries already causing a drain on Company’s liquidity. EFERT and FATIMA may be adversely affected if GIDC is also collected on concessionary gas.

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