Update Pulse

May 3, 2011

Fertilizer Sector Yet another episode of substantial growth in earnings

Pakistan Research

Synopsis
Sales of the sector posted an upsurge of 23% YoY. Highest growth of 30% YoY was observed in sales of ENGRO. Average price of the Urea and DAP was recorded 37% and 34% YoY higher in 1QCY11. Total financial cost of the sector rose by 32% YoY. Engro posted highest upsurge of 61% YoY in its financial cost. Other operating income rose by 39% YoY. Engro led the sector. Earnings of the sector posted a substantial rise of 38% YoY. FFBL recorded a highest increase of 93% in its earnings. Our DCF based target price for FFC and FFBL is PKR148 and PKR45 respectively. We recommend a HOLD stance.

year. Conversely, the none operating income of the showed a significant growth of 39% YoY because of a dividend income. As a result, PAT of the fertilizer witnessed a handsome growth 38% YoY over same last year.
(PKR m) Sales Cost of Sales Gross Profit S & D expenses Administrative expenses Operating Profit Finance Cost Other operating Expenses Other Operating Income Profit Before Tax Taxation Profit After Tax 1QCY10 34,314 23,458 10,856 2,713 623 7,521 1,504 414 1,962 7,565 2,222 5,536 1QCY11 42,085 26,967 15,118 2,918 847 11,353 1,988 682 2,722 11,406 3,698 7,635

sector strong sector period

Market Snapshot KSE 30 KSE 100 KSE ALL

HOLD
11683.76 12035.89 8376.77 -32.59 -21.65 -21.04 -0.28 -0.18 -0.25

% Chg 23% 15% 39% 8% 36% 51% 32% 65% 39% 51% 66% 38%

Cumulative sales witnessed an extensive rise of 23% YoY

The urea offtake volume of the sector during 1QCY11 was recorded 13% YoY lower to 1.23m tons in comparison of 1QCY10 when urea offtake volume was recorded at 1.42m tons. Similarly, DAP offtake witnessed a huge decline of 23% YoY to 0.16m tons as compare to 0.21m tons in corresponding period last year. On the other hand, average per bag price of both urea and DAP considerably increased by 37% to PKR1,113 and 34% to PKR3,303 respectively over 1QCY10. Consequently, total monetary sales of the sector grew by 23% YoY to PKR42.08bn as against PKR34.32bn in 1QCY10.

Source: Company Financials, Summit Capital Research

Key players performance FFBL steals the show FFBL

FFBL showed a robust financial performance during 1QCY11 as its bottom line showed a handsome growth of 93% YoY to PKR1.56bn versus PAT of PKR0.81bn in 1QCY10 due to increased DAP prices and other income by 147% YoY. Gross profit of the company posted a substantial rise of 52% YoY to PKR2.75bn. The company also announced a cash dividend of PKR1.25/share.
12M relative performance vs KSE
155% 137% 119% 101% 83% 65% Aug-10 Sep-10 Dec-10 Oct-10 Feb-11 Jan-11 Jun-10 Apr-11 May-10 May-11 Nov-10 Mar-11 Jul-10

FFC FFBL DAWH

KSE-100 ENGRO

Profitability performance net profit grew by 38% YoY

The total gross profit of the listed companies rose by 39% YoY (PKR15.12bn) over 1QCY10 mainly on the back of higher urea and DAP pirces. Aggregate selling and distribution expenses of the sector posted an upsurge of 8% YoY to PKR2.92bn versus PKR2.72 in 1QCY11. Financial cost of the sector grew by 32% YoY to PKR1.99bn as against PKR1.51bn in the corresponding period of the last

FFC
FFC also came out with impressive financial results in 1QCY11 as its revenue grew by 17% YoY to PKR11.10bn as against PKR9.50bn in 1QCY10. Gross profit of the company grew by 46% YoY to PKR5.92bn as against PKR4.05bn in same period last year. Thus, PAT posted a growth of 51% over same period the last year. The bottom line enjoyed a strong uplift from 13% YoY lower financial cost and 56% YoY higher other income. The company declared 45% cash dividend along with results.

Muhammad Sarfraz Abbasi Sarfraz.abbasi@summitcapital.com.pk 021-35376125 B-209, Park Towers, Clifton, Karachi

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

ENGRO
ENGRO stood as a star performer of the sector in terms of growth in revenue as its top line grew by 30% YoY to PKR21.85 over 1QCY10. Gross profit of the company posted an upsurge of 31% YoY to PKR6.12bn as against PKR4.68bn in 1QCY11. However, the company recorded 61% YoY higher financial cost to PKR1.45bn against PKR904m in same period of last year. The PAT of the company reached PKR2.04bn, showing an upsurge of 13% YoY.

PP a k i s t a nRR e s e a r c h akistan esearch

DAWH
Conversely to the other listed companies, DAWH posted decline in its sales revenue of 22% YoY to PKR1.08bn versus PKR1.39bn in 1QCY10. The company posted a loss per share of PKR0.61 in 1QCY11 mainly attributable to 1) decline in sales and 2) one time loss of PKR349.25m.

Future outlook and recommendations

We believe that the demand of urea will grow going forward owing to upcoming Kharif sowing season. However, increased prices for urea because of gas curtailment and imposition of GST may test purchasing power of the end user. The country is currently faced with an acute gap between demand and supply of the urea because of gas curtailment in the range of 12% to 20%. Thus, the government is forced to import fertilizer to abridge this persisting gap between supply and demand. We believe that locally made fertilizers are being sold at a substantial discount to the international prices. However, in our view, if government does not change its stance on gas curtailment, this would lead local producer to incur production losses. As a result, we believe, to avert production losses producers would raise prices even further. We believe, any further hike in urea prices will weaken the purchasing power of the farmers, thus, can put an adverse impact on agricultural production as a whole. Our DCF based target price for FFC and FFBL is PKR148 and PKR45. We recommend a HOLD stance.

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.