AKD Quotidian about — FATIMA 2QCY12 Result Preview: Bumper sales = bumper earnings

Karachi, July 06, 2012 (PPI-OT): AKD Securities expects FATIMA to post bumper earnings in 2QCY12, thanks to a strong rebound in sales, particularly in the month of June.

According to AKD Securities, in line with industry fertilizer off take, FATIMA is expected to outshine in Jun’12 where AKD Securities estimates urea, CAN and NP off takes at 130k tons, 78k tons and 23.5k tons, respectively. Dealers’ demand driven off take in Jun’12 is likely to boost 2QCY12 bottom-line where AKD Securities expects FATIMA to post a NPAT of PKR2.77 billion (EPS: PKR1.39). At current levels, AKD Securities retains AKD Securities’ liking for FATIMA which offers a significant upside of 53% to AKD Securities’ Dec-end TP of PkR38.5/share.

Dealer incentive did the trick in Jun’12: Industry urea off take for May’12 was registered at 377.5k tons, up 22%MoM, with FFC, FFBL and ENGRO securing well above 100%MoM increase in urea off takes. However, FATIMA was unable to break the ice, fetching just 1.5k tons of urea sales. In Jun’12, where total industry urea off take is estimated at ~1 million tons, FATIMA’s urea off take is also expected to spike to ~130k tons, which translates into 3 months of installed production capacity. Besides expectation of price hike in Jul’12, incentive of PKR40/bag offered to dealers on urea sales, further drove off take during Jun’12. Like urea, CAN off take for Jun’12 is also expected to come in at a record high level of 78ktons. Furthermore, following the robust sales of urea and CAN, AKD Securities expects significant decline in inventory levels and an improved cash flow position. NP off take, lagging behind urea and CAN, is expected to show a decent 22%MoM growth, recording at 22.5k tons.

2QCY12 earnings to grow 5x sequentially: AKD Securities forecasts 2QCY12 NPAT at PkR2.73 billion (EPS: PkR1.39), up by massive 5.3xQoQ. Similarly, for 1HCY12, AKD Securities expects NPAT to stand at PkR3.21 billion (EPS: PkR1.61). Earnings growth is expected to be driven by topline growth (+191%QoQ) following robust growth in off takes (total product sales up 208%QoQ to 329k tons). Gross margins are expected to fall by 4.8pps to 66.4%, where the fall in margins is attributed to lower product prices, however the surge in sales will more than make up for margin contraction.

2QCY12 Result Preview
(PKR million)

2QCY12F

1QCY12A

QoQ

1HCY12F

Net sales

9,728

3,347

191%

13,075

Gross profit

6,464

2,385

171%

8,849

Selling and administration expense

534

249

115%

783

Financial charges

1,493

1,453

3%

2,946

Other expenses

134

36

268%

261

Other income

224

26

756%

74

NPBT

4,260

673

533%

4,933

Taxation

1,487

236

532%

1,723

NPAT

2,773

438

534%

3,210

EPS (PKR) @ 2 billion shares

1.39

0.22

534%

1.61

Diluted EPS (PkR) @ 2.1 billion shares

1.32

0.21

534%

1.53

Investment Perspective: Despite the challenges faced by the fertilizer sector in the form of gas curtailment, threat of urea imports and weak farmer purchasing power FATIMA is still relatively better positioned to navigate through these challenges largely due to assurity of gas supply. By incorporating lower urea price at PKR1 720/bag for 2HCY12 and higher fertilizer off take (post robust Jun’12 sales), AKD Securities estimates FATIMA to post NPAT of PkR3.7 billion in CY12 (EPS: PkR3.7). FATIMA is trading at relatively undemanding CY12 and CY13 PE of 6.8x and 4.0x respectively. FATIMA also offers a CY12 dividend yield of 8% where an upside surprise may come from announcement by sponsors to defer CY12 dividend (as witnessed last year), in which case DPS estimates will increase from AKD Securities’ base case of PkR2.0 to PkR2.75. Currently AKD Securities retains AKD Securities’ liking for FATIMA at target price of PkR38.5/share, offering a significant upside of 53% from current levels.