Morning Call about -Gas risk still subdued; earnings estimate, price target maintained – Arif Habib Limited

Karachi, June 07, 2013 (PPI-OT): The year CY13 started with a boost for the fertilizer sector, with the better urea and DAP off take. ENGRO remained deprived and faced major gas curtailment in CY12.

According to Arif Habib Limited news efficiencies and effective production led the company to revive back to the green zone with the end of 1QCY13. The company posted massive 2.7x YoY jump in the urea off take in 1QCY13.

This growth in the off take leads the company to post massive 2.0x YoY escalation in sales and 3.6x massive increase in the gross profit. All these positives with the company contributed to post 1QCY13 EPS of PKR 0.60 as compared to the LPS of PKR 1.32 in the corresponding period last year.

Profit and Loss (PKR mn)     1QCY13   1QCY12      YoY
Urea off take (k tons)          299       80     274%
Net Sales                     9,717    3,203     203%
Gross Profit                  4,212      900     368%
Selling expenses                718      321     124%
Admin expenses                  153      160      -4%
Other Income                    151       88      71%
Other Operating Expenses        289       64     352%
Financial Charges             2,204    2,629     -16%
Profit/(loss) before tax        999  (2,185)      n.m
Profit/(loss) after tax         646  (1,420)      n.m
EPS                            0.60   (1.32) 

Source: Company accounts 

Earnings expected to grow in 2QCY13
As the preliminary off take numbers of May’13 for the company suggest, the total off take for the month of May’13 clocked in at 121 k tons. ENGRO’s Cumulative off take for April and May stood at 171 k tons.

Further, strong volumes are also expected in Jun-13 on account of strong pre-buying in the anticipation of gas price increase from Jul-13 onwards (recall that last year industry off take for Jun-12 stood at 1,029k tons, ENGRO’s at 223k tons). In 5MCY13, urea off take of the company has massively surged by 1.7x YoY. With these facts, Arif Habib Limited expects strong buying in Jun-13 and, thus company earnings to grow further in 2QCY13.

Outlook with respect to rotational allocation
With the smooth democratic transition in Pakistan politics recently, the hope for betterment is expected across all the key sectors. Though the newly elected setup is expected to face a list of challenges, Arif Habib Limited expects better overall management of the energy sources to not only tackle the energy crises facing the country but to also balance resource allocation to other key sector i.e.

Fertilizer. In this regard, Arif Habib Limited has run a sensitivity analysis with respect to number of day’s rotational gas would be available to ENGRO (base case 45 days). Recall that ENGRO received 30 days rotational allocation in April-13.

Base Plant utilization sensitivity
No of days Production (Kton) Efert(PKR) EPS ENGRO EPS(PKR)

  20              62                1.58         14.71 
  30              93                1.91         15.39 
  45             140                2.39         16.40 
  60             186                2.87         17.41 

Source: AHL Estimates