AKD Quotidian about — FFC: Spurt in 2QCY12 earnings, thanks to rebound in urea offtake!

Karachi, July 12, 2012 (PPI-OT): As per industry source, FFC registered urea offtake of ~570k tons during Jun’12, turning out to be big beneficiary of price reduction strategy led by itself where dealers’ price arbitrage anticipation drove the volumetric sales.

According to AKD Securities, resultantly, total urea off take for 2QCY12 is expected to register at 850k tons, up by a significant 2.6xQoQ. AKD Securities estimates FFC to post NPAT of PKR 6.4 billion (EPS: PKR 5.06), up by an encouraging 66%QoQ, in 2QCY12 where DPS of PKR 4.5-5.0 is expected to supplement the 2QCY12 result. In this regard, 1HFY12 NPAT is forecast to stand at PKR 10.3 billion (EPS: PKR 8.1), up 26%YoY, At current levels, AKD Securities retains ‘Buy’ recommendation on FFC with Dec’12 TP of PKR 144/share, implying a 23% upside.

2QCY12 to post superb earnings amidst urea price cut: AKD Securities expects FFC to post an NPAT of PKR 6.4 billion (EPS: PKR 5.06) in 2QCY12, up 66%QoQ, on the back of a spurt in urea off take, estimated at ~850k tons compared with just 329k tons last quarter. As a result, AKD Securities expects FFC to have nearly completely liquidated its urea inventory at 2QCY12 end. Gross margin for 2QCY12 is expected to dip by 1.4ppt QoQ due to decline in urea price. Financial charges are also forecast to remain a tad higher (+9%QoQ) due to the inventory pile up during most of the quarter (urea sales skewed towards) the end of the quarter). Lower other income at PKR 437 million (-80%QoQ), is expected to drag a superb quarter’s earnings as FFBL did not announce dividend in last quarter. NPAT for 1HFY12 is expected at PKR 10.3 billion, up by a significant 26%YoY. Given the unchanged urea offtake over corresponding period (up by a modest 0.4%YoY), primary driver of sequential improvement in earnings is higher urea prices in 1HFY12 compared to 1HFY11; however, gross margin is expected to contract by 7.1pptYoY due to higher gas price, specifically feedstock (GIDC imposition).

FFC: 2QCY12 Result Preview
(PKR million)1HCY12EYoY2QCY12EQoQ
Net sales

37,805

56%

26,372

131%

Gross profit

18,668

36%

12,910

124%

S and A exp.

3,671

70%

2,331

74%

Other income

2,577

-11%

437

-80%

Financial charges

581

23%

303

9%

PBT

15,662

22%

9,902

72%

PAT

10,312

26%

6,437

66%

EPS (PKR) 1,272 million sh.8.115.06  
Source: Company Reports and AKD Research

Investment Perspective: FFC is trading at attractive CY12 and CY13 dividend yields of 13.5% and 16.7%, respectively, under AKD Securities’ base case scenario which assumes 125k tons closing inventory at CY12 end. Key upside could come in the form of ENGRO initiated urea price hike, where ENGRO may contemplate a urea price hike given the cash flow constraints arising from Enven plant closure and the debt repayments. Currently, AKD Securities retains AKD Securities’ liking for FFC (trading at CY12F and CY13 P/E multiples of 7.3x and 6.0x), while the scrip offers an upside of 23% to AKD Securities’ Dec-end TP of PKR 144/share.