Pakistan Fertilizer: Profits likely to be down 14% in 3Q2022

Profits in Pakistan’s fertilizer sector are likely to decline by 14% year on year (YoY) in 3Q2022, mainly due to a decline in urea and DAP offtakes in 3Q2022 due to floods.

However, profits in Pakistan’s fertilizer industry are likely to rise quarter to quarter (QoQ) basis due to lower taxes.

Pakistan Fertilizer Outlook

Fertilizer Universe earnings are to be down by 14% YoY to Rs11bn primarily attributed to declining in Urea and DAP offtakes in 3Q2022 due to floods.

The same is expected to jump by 2.2x QoQ due to the absence of Super Tax during 3Q2022. Pre-tax profits are anticipated to be down 9% YoY and 29% QoQ due to the reasons mentioned above.

 As a result, market experts expect 9M2022 earnings to clock in at Rs30bn, down 19% YoY. However, pre-tax profits are likely to increase by 15% YoY.

 Urea sales are anticipated to decline by 13% YoY and 6% QoQ to 1.5mn tons in 3Q2022. DAP offtake is also likely to be down by 77% YoY and 58% QoQ to 141k tons during 3Q2022.

This is likely to take 9M2022 Urea and DAP sales to 4.8mn tons (+2% YoY) and 724k tons (-40% YoY), respectively.

 Average, Urea prices (MRP) during 3Q222 remained at around Rs2,200/bag compared to Rs1,900/bag in 2Q2022 and Rs1,750 in 3Q2021 as all companies have increased their Urea prices to pass on inflationary impact to final consumers.

  DAP prices have also increased by 107% YoY and 28% QoQ to average around Rs12,500/bag, which is in line with the increase in international DAP prices and rupee devaluation against the US dollar.

  Finance cost is expected to increase by 168% YoY to Rs4.4bn due to higher interest rates and higher borrowings of the sector.

We maintain our Over-Weight stance on the Pakistan Fertilizer sector. Our preferred play in the sector is Engro Fertilizers (EFERT) and Fauji Fertilizer Company Limited (FFC), Topline Pakistan Research said.

  Fauji Fertilizer Company (FFC): We expect FFC to post unconsolidated EPS of Rs4.1 down 20% YoY in 3Q2022. The decline in earnings is led by a decline in Urea and DAP offtakes by 26% YoY and 92% YoY in 3Q2022 and (2) higher finance costs.

However, some of the impacts are expected to be offset by a 125% YoY increase in other income due to higher income on deposits.

  However, earnings are likely to jump by 54% QoQ primarily due absence of Super Tax. Along with the result, we expect the company to announce an interim cash dividend of Rs3.25/share, taking the 9M20222 dividend to Rs9.05/share.

Engro Fertilizers (EFERT)

Pakistan Topline Research expects EFERT’s consolidated EPS to be up by 4% YoY to Rs3.4/share in 3Q2022 despite a decline in Urea and DAP offtake due to higher retention price. Similarly, QoQ earnings are expected to jump amid the absence of Super Tax.

 After skipping dividends due to recording a loss in 2Q2022, we expect cash dividends to resume from 3Q2022 where we expect an interim cash dividend of Rs3.50/share in 3Q2022, which will take 9M2022 dividend to Rs9/share.

 Fauji Fertilizer Bin Qasim (FFBL)

Topline expects FFBL to post unconsolidated EPS of Rs1.2 in 3Q2022, down 32% YoY mainly due to a decline in Urea and DAP offtake. However, some of the impacts are expected to be offset by higher retention price, and higher income on deposits.

 Despite the absence of Super Tax, earnings are also likely to drop by 13% QoQ primarily due to the reasons mentioned above. We do not expect the company to announce any dividend with the 3Q2022 result.