Morning call about – Fauji Fertilizer Company Limited Chemicals – Arif Habib Limited

Karachi, January 28, 2014 (PPI-OT): FFC CY13 Preview; Earnings to drop 6% YoY

The Board of Directors of Fauji Fertilizer Company Limited (FFC) is scheduled to approve its annual results for CY13 on 29th January, 2014.

According to Arif Habib Limited, they expect the company to post profit after tax (PAT) of PKR 19,580mn (EPS: PKR 15.39), depicting a decline of 6% YoY from CY12 PAT of PKR 20,840mn (EPS: PKR 16.38). Arif Habib Limited expects the company to announce final cash dividend of PKR 3.50/share taking the total cash payout for CY13 to PKR 14.85/share (down 4% YoY).

P&L Statement (PKR mn)                      4QCY13E   3QCY13A      QoQ      CY13E    CY12A    YoY
Sales                                       17,979    18,128       -1%      70,512   74,323   -5%
Gross profit                                 8,484     8,865       -4%      33,661   35,998   -6%
Selling & Admin expenses                     2,215     2,240       -1%       8,591    5,561   54%
Other income                                   746     1,414      -47%       4,153    4,268   -3%
Finance cost                                   239       236        1%         823      999  -18%
Profit before taxation                       6,776     7,803      -13%      28,401   31,021   -8%
Profit after taxation                        4,682     5,402      -13%      19,580   20,840   -6%
EPS (PKR)                                     3.68      4.25                 15.39    16.38
DPS (PKR)                                     3.50      4.10      -15%       14.85    15.50   -4%
Source: Company Accounts, AHL Research

Top-line expected to drop by 5% YoY

Net revenues of the company are expected to decline 5% YoY to PKR 70,512mn in CY13. This drop is mainly due to lower average urea prices (-2% YoY) during the period. However, urea off take for the company is expected to remain stagnant at 2,394k tons in CY13E versus 2,399k tons in the last year.

Other income to decline 3% YoY while SDA expenses up 54% YoY

In CY13, other income is expected to remain stagnant to PKR 4,153mn down by meagre 3% YoY. This skimpy decline is mainly due to absence of FFBL’s dividend income in first quarter. In addition, Selling and admin expenses expected to surge 54% YoY mainly on account of higher transportation charges during the year.

GIDC impact on FFC

The reduction of urea prices by PKR 114/bag this month would translate into negative earnings impact of PKR 2.38/share (15% of CY14F earnings) in case of failure to pass on this price to the end consumers. However, Arif Habib Limited’s industry checks suggest that the company will pass on this price in phase-wise manner.

Recommendation

Arif Habib Limited’s DCF based Jun-14 target price for the scrip works out to PKR 125/share, translating into an upside potential of 7% from current level. The stock is trading at CY14F PER level of 7.6x while offering an attractive dividend yield of 13% based on CY14F earnings.

2) EFOODS analyst briefing update

Engro Foods Limited (EFOODS) held its analyst briefing yesterday to discuss its CY13 result. On standalone basis, the company posted PAT of PKR 211mn (EPS: PKR 0.28) in CY13, massively down 92% YoY. The loss is mainly attributable to the recognition of cash losses of PKR 673mn (Engro Foods Netherland), sales tax charge of PKR 208mn and net loss of PKR 149mn in 4QCY13.