Pakistan’ Fertilizers’ Profits Likely Down 3% QoQ in 2Q2024

Staff Report: Topline Pakistan has forecast that Pakistan’s fertilizer projects are likely to go down 3% QoQ in 2Q2024.

We expect Topline Fertilizer universe earnings to decline by 3% due to a 34% decline in urea sales. On a YoY basis, earnings are expected to increase by 3.6x YoY to Rs25bn, as tax expenses in 2Q2023 were higher. Adjusting for this, Profit Before Tax (PBT) of the companies is up 78% YoY in 2Q2024,” Topline said.

This will take 1H2024 earnings to Rs50bn, up 3.7x YoY, thanks to an increase in our universe gross margins by ~200ppts and a lower effective tax rate of 40% (vs. 63% in 1H2023).

Urea sales declined by 18% YoY and 34% QoQ to 1.2mn tons in 2Q2024. Similarly, DAP offtake decreased by 7% YoY and 11% QoQ to 256k tons during 2Q2024. This took 1H2024 urea and DAP sales to 3.03mn tons (-2% YoY) and 545k tons (+5% YoY), respectively.

Average urea MRP during 2Q2024 increased by 59% YoY and 2% QoQ to Rs4,822 per bag. Similarly, DAP prices have also increased by 15% YoY and came down by 8% QoQ to average around Rs11,556 per bag.

To recall, the government raised fertilizer gas prices to Rs1,597/mmbtu for both feed and fuel, effective from Feb-2024, except for MARI-based fertilizer plants (i.e., FFC, etc.).

Gross margin of the sector is expected to increase by 450bps to 32% in 2Q2024 vs. 27% in 1Q2024. In 1H2024, the sector’s gross margin is expected to clock in at 29% vs. 27% in 1H2023.

Finance cost of the sector during 2Q2024 is expected to decline by 40% YoY and 5% QoQ to Rs2.8bn, primarily due to a decline in borrowings.

We maintain our Market-Weight stance on the Pakistan Fertilizer sector.

Fauji Fertilizer Company (FFC): The board of FFC is scheduled to announce its 2Q2024 result on July 30, 2024, wherein we expect FFC to post unconsolidated earnings of Rs11.9/share, up 182% YoY in 2Q2024. The increase in earnings is mainly due to (1) an increase in urea and DAP offtake along with higher prices and (2) a 29% YoY decline in finance cost.

On a QoQ basis, we anticipate earnings to grow by 44%, despite an 18% QoQ decline in urea sales due to higher gross margins. To recall, the company raised its urea prices by 17% to Rs4,400/bag at the end of 1Q2024, despite no change in gas prices. Gross margins are expected to clock in at 44% in 2Q2024 vs. 30% in 1Q2024.

Along with the result, we expect the company to announce a cash dividend of Rs7.5/share, taking the 1H2024 dividend to Rs13/share.

Engro Fertilizers (EFERT): The board of EFERT is scheduled to announce its 2Q2024 result on July 30, 2024, wherein we expect EFERT to post consolidated earnings of Rs3.8/share in 2Q2024 compared to Rs0.8/share in 2Q2023. The significant YoY jump in earnings is due to the impact of the super tax recorded by the company last year.

On a sequential basis, we expect earnings to decrease by 53% QoQ due to a 37% QoQ decline in urea offtake, led by a 58-day turnaround at the EnVen plant. Gross margins are expected to remain stable at around 30% in 2Q2024.

Along with the result, we expect the company to announce a cash dividend of Rs3.6/share, taking the 1H2024 dividend to Rs11.6/share.

Fauji Fertilizer Bin Qasim (FFBL): The board of FFBL is scheduled to announce its 2Q2024 result on July 25, 2024, wherein we anticipate FFBL to report unconsolidated earnings of Rs3.5/share in 2Q2024, a significant increase from the EPS of Rs0.37 in 2Q2023. This improvement is primarily due to (1) a 470bps rise in gross margins to 17.6% in 2Q2024, (2) a 63% YoY decline in finance cost, (3) absence of exchange losses, and (4) absence of super tax recorded in 2Q2023.

On a QoQ basis, we expect earnings to increase by 6% mainly due to an increase in urea offtake by 135% in 2Q2024.

We expect the company to announce a cash dividend of Rs1.5/share.