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Fertilizer earnings future revised as urea offtake set to beat outlook

Pakistan’s leading brokerage house, Topline Securities has revised its earnings forecasts fertilizer companies operating in the country. The upward revision has come on the back of: 1) higher than expected Urea offtake during first ten months of the current calendar year, 2) impact of Gas Infrastructure Development Cess (GIDC) review petition and 3) detailed review of first nine months accounts.

Urea offtake is likely to beat expectations; the brokerage house expects the offtake to rise to 5.8 million tons, in line with last five years average offtake as against its earlier estimate of 5.5 million tons. To note, it had previously trimmed Urea offtake on expectations of supply side disruptions amidst COVID-19 outbreak and impact of locust attack.

Another contributing factor is 48-monthly installments instead of 24 for GIDC payment. The Supreme Court of Pakistan has dismissed review petitions on Gas Infrastructure Development Cess (GIDC). However, as per the verdict, all fertilizer companies can now pay their outstanding amounts in 48 equal monthly installments instead of 24 monthly installments.

All the companies have already accounted for GIDC in their accounts except for EFERT’s on its Enven Plant, for which the Company has taken a stay order from the Sindh High Court. Topline has also not taken impact of EFERT’s Enven plant in its model.

The brokerage house maintains Buy ratings on Fauji Fertilizer (FFC) and Engro Corporation (ENGRO), Hold on Engro Fertilizer (EFERT) and upgrade Fauji Fertilizer Bin Qasim (FFBL) to a Hold from Sell earlier. It has a Market-weight stance on the sector.

The brokerage house has revised up its earnings forecasts for Fauji Fertilizer Company (FFC) by 28% for 2020 primarily due to increase in Urea offtake estimate by 8% to 2.5 million tons for 2020 from earlier estimate of 2.3 million tons. The brokerage house has also revised up its 2021 and 2022 earnings given that the Supreme Court has allowed GIDC payment over 48 monthly installments instead of 24.

Engro Fertilizers (EFERT) earnings forecast has been revised up by 8-61% for 2020 to 2022 on the back of: 1) revision in Urea offtake estimate for 2020 to 2.0 million tons from 1.7 million tons, 2) one-time tax reversal of Rs2,117 million for third quarter of current calendar year and 3) incorporating the impact of GIDC review petition.

The brokerage house has also revised up EPS forecasts for Engro Corporation (ENGRO) by 5-28% for 2020 and 2022. Revision is attributed to: 1) upward revision in earnings estimate for EFERT due to the above mentioned reasons and 2) increase in earnings estimate for Engro Polymer & Chemicals (EPCL) amidst higher than expected PVC-Ethylene margins and better than expected 9MCY20 earnings.

Earnings of Fauji Fertilizer Bin Qasim (FFBL) have been revised for 2020 from a LPS of Rs1.63 to an EPS of Rs1.7. The turnaround is primarily on the back of: 1) higher than expected DAP offtake (37%YoY in first ten months of current calendar year, 2) higher than expected margins on DAP, 3) above expected dividend from FFBL power company and 4) lower effective tax rate at 16%.

The brokerage house also revise up 2021 and 2022 earnings mainly due to 1) injection of new equity via right shares of Rs5 billion and 2) incorporating the impact of GIDC review petition (savings of Rs0.23/share).

As per the data released by the NFDC, urea offtake for October 2020 increased 5%MoM and 247%YoY to 413,000 tons. The significant uptick in offtake on YoY basis was due to low base effect. To recall, gas price hike of 62% for feedstock and 31% for fuel became effective in July 2019, and consequent urea price hike in September 2019 led to a pre-buying trend in preceding months (urea price hike was on hold, in anticipation of GIDC removal).

On cumulative basis, urea offtake is up 3%YoY in 10MCY20. However, the cumulative numbers are not reflective of the actual offtake trend for fertilizer players operating on indigenous gas, which have posted a double digit growth in offtakes over 10MCY20. However, LNG based FatimaFert and Agritech witnessed 91YoY and 74%YoY decline in offtakes respectively in 10MCY20, taking the cumulative industry offtake number to 3%.

Amidst indigenous gas based Fertilizer players, FATIMA emerged as leader with 55%YoY increase in urea offtake during 10MCY20, followed by FFBL with 28%YoY higher urea offtake during the period. The urea inventory at 671,000 tons has increased 44%MoM due to LNG supply to hitherto closed fertilizer plants, it still remains 24% lower than levels in the same period last year.

FFBL’s market share in aggregate DAP offtake rose to 57% in October 2020. This was despite DAP offtake for the month remaining flattish on MoM, but declined 15%YoY. The offtake was recorded at 229,000 tons. This is due to lower imports of DAP on the back of uptrend in DAP international prices. FFBL, the sole local manufacturer, has therefore witnessed increase in market share during October 2020. FFBL posted 37%MoM and 163%YoY increase in DAP offtakes. As against this, EFERT posted a decline of 21%MoM and 41%YoY in October 2020.

While phosphoric prices have recently seen an upward trend, analysts expect FFBL to remain at forefront in terms of DAP offtake, leading to profits on core business in 4QCY20. However, on the flipside, some of those gains are expected to be pared off by the budgetary measures discouraging sales to unregistered dealers.

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