Engro Fertilizers outperforms peers

Quarterly results of fertilizer manufacturers were keenly awaited by the investors. My previous post hinted towards the possible decline in earnings of the companies due to: 1) reduction in international prices of urea and 2) slower offtake. Today, review of the accounts of three companies are presented. Only one company, Engro Fertilizer has posted above expectations results, while Fauji twins have posted below expected results. Results of Fatima and Dawood are still awaited.  

Engro Fertilizers (EFERT) has posted unconsolidated profit after tax of Rs2.86 billion (EPS: Rs2.15) for July-September 2016 period as compared to net profit of Rs2.79 billion (EPS: Rs2.10) for the corresponding period of last year, an increase of 3%YoY. The recovery in earning has come from, 1) strong growth in topline to Rs20.76 billion (including subsidy) caused by likely 39%YoY increase in Urea offtake to 502,000 tons post subsidy in budget FY17 and 2) 31%YoY decrease in finance cost on account of swift deleveraging and low interest rate environment. The result also accompanies an unexpected cash dividend of Rs2.50/share, taking 9MCY16 cumulative dividend payout to Rs4.50/share. On a cumulative basis, 9MCY16 earnings slipped to Rs5.66 billion (EPS: Rs4.25) compared to Rs9.91 billion (EPS: Rs7.44) for 9MCY15, down 43%YoY on account of unprecedented adverse market conditions caused by weak farm economics (urea offtake down 16%YoY in 8MCY16) and delayed implementation of subsidy on urea by the GoP.

Fauji Fertilizer Company (FFC) has posted unconsolidated profit after tax of Rs2.61 billion (EPS: Rs2.05) for July-September 2016 quarter as compared to a net profit of PkR3.69 billion (EPS: PkR2.90) for the corresponding period last year, a decrease of 29%YoY. The decline in earnings was expected on the back of: 1) gross margins declining to 32% (includes subsidy) on account of reduction in Urea prices (down 9%YoY) due to depressed farm economics and low international prices, down 36%YoY to an average US$184/ton during 3QCY16 and 2) a 83%YoY decline in other income (excluding subsidy) in the absence of dividend from associated companies (AKBL, FFBL and FCCL) and reduction in return on term deposits. However, the result was also accompanied by a cash dividend of R1.75/share, taking 9MCY16 cumulative dividend payout to Rs5.15/share. On a cumulative basis, 9MCY16 earnings declined to Rs7.51 billion (EPS: Rs5.90) as compared to Rs11.96 billion (EPS: Rs9.40) for 9MCY15, down 37%YoY on account of unprecedented adverse market conditions caused by weak farm economics, urea offtake down 16%YoY during 8MCY16 due to delayed implementation of subsidy on urea by the GoP.

Fauji Fertilizer Bin Qasim (FFBL) has posted unconsolidated net loss of Rs1.05 billion (LPS: Rs1.13) for 9MCY16 as against net profit of Rs939 million (EPS: Rs1.01) for 9MCY15. This significant downturn in earning resulted from, 1)gross margin declining to 14% (including subsidy) on account of significant reduction in DAP prices, down 15%YoY due to depressed international price trends. Price came down 24%YoY to an average US$325/ton during 9MCY16 and increased feed and fuel gas prices in 1QCY16  and 2) a 38%YoY lower other income (excluding subsidy of Rs3.18 billion on DAP and Urea in the absence of dividend from associated companies and reduction in term deposit placements. Following the trend 3QCY16 the Company posted net loss of Rs159 million (LPS: Rs0.17) for 3QCY16 as against net profit of Rs181 million (EPS: Rs0.19) for 3QCY15. However, on sequential basis, 3QCY16 earnings improved slightly against net loss of Rs381 million (LPS: Rs0.41) 2QCY16 on the back of likely increase in DAP/Urea offtake to post subsidy announcement in Federal Budget FY17.