Karachi: Earnings of AKD Fertilizer Universe companies are set to fall sharply in 1QCY12 largely due to low urea demand, which is the consequence of NFML flooding the market with cheap imported urea earlier in the year (imported urea priced at ~PkR500/bag lower than the urea manufacturers price tag of PkR1 790/bag).
According to AKD Securities, furthermore, absence of any price increase trigger has also dimmed urea demand, at least at the dealer level; on the contrary, there has been speculation of urea price fall. AKD Securities expects urea sales of AKD Securities‘ universe companies on YoY basis to fall by ~37% to 74%, with the sharpest fall likely in FFBL offtake. Similarly, earnings of AKD Securities’ universe companies with the exception of FFC are likely to plunge in 1QCY12. Based on AKD Securities’ initial estimates, FFBL’s earnings are likely to fall 92%YoY to PkR125mn (EPS: PkR0.13) in 1QCY12 where plant shutdown during most of 1QCY12 coupled with lower product demand, particularly of DAP will likely haemorrhage earnings. Furthermore, earnings of ENGRO Fertilizer are also anticipated to fall by 97%YoYto PkR50mn (EPS: PkR0.10) as low offtake coupled with higher financial and depreciation charges will severely dent earnings. FATIMA earnings are also forecast to fall sequentially by 61%QoQ to just PkR938mn (EPS: PkR0.47). FFC is likely to be the only exception to the trend where higher dividend income from FFBL coupled with relatively lower decline in sales is likely to shield FFC from earnings attrition.
EPS sensitivity to a PkR100/bag change in urea price: Given the current dull urea sales environment coupled with the threat of further imports of urea, the manufacturers mop contemplate reducing prices in order to stimulate sales. AKD Securities has provided AKD Securities’ CY12 EPS sensitivity to PKR100/bag fall in price (see table on right), where clearly earnings of ENGRO are likely to be most impacted.
Will urea sales rebound in 2QCY12? According to NFDC, urea inventory with NFML stood at 106k tons at the end of Jan’12, while a further ~500k tons are expected to be imported during 1QCY12. Given the high urea imports, urea sales of manufacturers are likely to remain under pressure at least till Apr’12; however, AKD Securities expects a sequential surge in company manufactured sales once imported urea is lifted from the system. Furthermore, the recently announced hike in imported urea prices by PkR300/bag is also likely to lift buying at the company level.
Outlook: Despite the risks emanating from expected poor 1QCY12 results, AKD Securities still has a positive view on Fertilizers where AKD Securities sees a sequential improvement in earnings post 1QCY12. Furthermore, recent rise in global urea prices also bodes well for Pak Fertilizers urea pricing power. Potential weakness in share prices in anticipation of poor 1QCY12 results should be taken as an opportunity to take positions in FFC and EGRO at lower levels for which AKD Securities has Buy recommendations with respective fair values of PkR145/share and PkR174/share while AKD Securities hold a ‘Neutral’ stance on FFBL (TP: PkR49/share). AKD Securities is in the process of initiating coverage on FATIMA and in this regard will come out with a detailed report shortly.