Morning Call about FFC earnings rose by hefty 61% YoY in 1HCY11 – Arif Habib Limited

Karachi: Fauji Fertilizer Company Ltd (FFC) recorded a profit after tax (PAT) of PKR 4,080mn (EPS: PKR 4.81) in 2QCY11 taking 1HCY11 earnings to PKR 8,189mn (EPS: 9.65), an increase of 61% YoY despite the gas curtailment issue.

According to Arif Habib Limited, the reasons for this stupendous growth are higher urea (+27% YoY) prices and rise in other income (+89% YoY). However, urea off take recorded a contraction of 5% YoY to 1,174 kT. Along with the result, the company declared second interim cash dividend of PKR 4.75/share taking 1HCY11 result to 9.25/share.

 

P&L statement (PKR mn)2QCY111QCY11%chg1HCY111HCY10%chg
Sales13,12011,10018%24,22119,94721%
Cost of sales5,3375,1903%10,52711,113-5.3%
Gross profit7,7835,91032%13,693 8,83455%
Selling & Admin expenses1,1481,01813%2,1661,869 16%
Other income9191,963-53%2,8821,525 89%
Finance cost2422296%471494-5%
Profit before taxation6,6986,119 9%12,8177,36574%
Taxation2,6182,01030%4,6282,264104%
Profit after taxation 4,0804,109-1%8,1895,10161%
Earnings per share (PKR)4.814.409.656.01  
Source: Company Accounts

 

 

Net revenue increased by 21% YoY to PKR 24.2bn

Net revenues of the company grew from PKR 19,947mn to PKR 24,221mn in 1HCY11, a healthy increase of 21% YoY. This was due to higher Urea prices despite off take registering a drop of 5% YoY to 1,174 kT. Lower off take was attributable to decrease in production caused by gas curtailment and plant turn around in February 2011. Urea prices on average soared by 27%YoY to PKR 1,030/bag (ex-factory price) during 1HCY11 from PKR 810/bag same period last year consequent to rise in feedstock prices and gas curtailment issue to mitigate the production losses. Gross profit margin during the period stood at 57%, a surge of 1200bps from same period last year.

FFBL’s dividend contributed PKR 2,262mn to FFC’s net profit

Other income registered an increase of 89% YoY to PKR 2,882mn in 1HCY11, mainly on account of rise in dividend received from FFBL. During the period dividend income from FFBL contributed 78% (PKR 2,262mn) to other income of the company compared to 86% (PKR 1310 mn) in corresponding period last year. FFBL has again announced a cash dividend of PKR 1.50/share in 2QCY11 which will help augment FFC’s 3QCY11 earnings by 0.85/share.

Robust Urea Demand and higher prices to propel growth for FFC

Going forward, given stable Urea demand and downward sticky prices, the company’s earnings is expected to grow by 76% YoY in CY11E to PKR 22.94/share. Moreover, plants on Mari network would continue to benefit on behalf of Urea plants on the SNGPL network. Along with strong operating performance, Arif Habib Limited believes the company to maintain its outstanding dividend payout policy at above 90-95% going forward.

Recommendation

At current price level of PKR 161.80/share, the stock of FFC offers an upside potential of 19.9% to Arif Habib Limited’s Dec’11 target price of PKR 194.0/share. Further, the scrip offers an attractive CY11 dividend yield of 13.0%.