Morning Call about – Urea prices down PKR 114/bag Fertilizers -Arif Habib Limited

Karachi, January 13, 2014 (PPI-OT): In a recently held meeting with the Ministry of Finance, Fertilizer manufacturers agreed to reduce urea prices by PKR 114/bag.

According to Arif Habib Limited, to recall, hike of PKR 160/bag to PKR 180/bag in the urea prices was due to increase in GIDC by PKR 103/mmbtu for feed stock and PKR 50/mmbtu for fuel stock. Following reversal in urea prices, the net amount of urea price increase now stands at PKR 56/bag.

Impacts seem severe but the reduction of PKR 114/bag will translate into annualized after tax impact of PKR 2.33/share (-15%) for FFC, PKR 0.41/share (-6%) for FFBL and PKR 1.54/share (-38%) for EFERT (ENGRO Corp PKR 3.91/share).

Reduction in urea prices by PKR 114/bag
CY14E            Annualized        CY14E/        Change
Company     production          after-tax        share
mn tons         Impact/share
FFC           2.34                  (2.33)        15.56          -15%
FFBL          0.30                  (0.41)         6.56           -6%
EFERT         1.58                  (1.54)         4.11          -38%

Source: AHL Research outcome expected to be neutralized apparently, with the above impacts, companies’ earnings seem to take a major hit; however, with Arif Habib Limited’s discussion with the industry, the fertilizer manufacturers will pass on this impact (PKR 114/bag) in phased manner, where manufacturers would increase urea prices gradually (say in a month or so) and pass on the complete GIDC impact to the end consumers.

Post USc 70/mmbtu gas to EFERT, scenario expected to change
In the last meeting of the ECC, the committee has forwarded the case of gas supply to EFERT at USc 70/mmbtu to the Ministry of Law, and the decision on the same is still awaited. With the recent reduction in urea prices, there is a bright possibility that no manufacturer would decrease urea prices post confirmation of gas to EFERT at USc 70/mmbtu.

Outlook and recommendation
Currently, Arif Habib Limited maintains Arif Habib Limited’s price objectives and earnings estimates of the fertilizer companies, as Arif Habib Limited expects gradual price recovery in the short to medium term. Currently, Arif Habib Limited has a ‘Buy’ recommendation on FFBL and EFERT with Jun-14 price objectives at PKR 52/share and PKR 35/share, respectively, while Arif Habib Limited maintains Arif Habib Limited’s ‘Hold’ recommendation for FFC with Jun-14 price objective at PKR 125/share.