The Bell about Chemical – Elixir Securities Limited

Karachi: FFC: Robust 4Q likely; GIDC poses a risk

Urea shortage amid higher prices shall beef up CY12 earnings
2% YoY decline in urea off take during 11MCY11 mainly emanated from higher prices along with high base effect of last year. However, recent gas shut down to SNGPL based network coupled with likely delay in arrival of imported urea suggests urea scarcity shall persist during the ongoing month as well.

According to Elixir Securities Limited, this shall bode well for FFC which is facing curtailment of a mere 9%. FFC operated at 117% utilization in the month of Nov‐11. Elixir Securities Limited believes the company shall maintain its current utilization in Dec‐11 and therefore Elixir Securities Limited expects CY11 total off take at 2.4mn tons. Moreover, FFBL’s 3Q dividend shall be booked by FFC in 4Q which shall further jack up bottom line. Thus, based on Elixir Securities Limited’s initial estimates, Elixir Securities Limited expects 4QCY11 EPS at PKR7.2 taking full year EPS to PKR23.5.

GIDC neutral for ENGRO; FFC likely to take a hit
Elixir Securities Limited’s channel check indicates that ENGO shall transfer increase in feed gas prices, post GIDC (Gas Infrastructure Development Cess), to end consumer, as has been the case in the past where increase in gas has been passed on. However, assuming current satiation (91% utilization of ENGRO’s old plant and 35% of new plant) persists in CY12, ENGRO would only have to increase its prices by just PKR150/bag in order to fully neutralize the impact. FFC and other urea manufacturers require an increase of PKR225/bag. Thus FFC’s earnings shall take hit of PKR2.3/share, if it does not fully pass through GIDC.

Elixir Securities Limited does not see any further hike in urea prices, except for GIDC, if the current scenario of gas supply persists in CY12. However, further worsening of gas supply or any delay in gas restoration to EnVen would increase the likelihood of further spike in prices. In that case, FFC shall maintain its beneficial position for being on the low curtailment Mari network.