Morning Call about -Off take + margins, All good to propel earnings – BUY – Arif Habib Limited

Karachi, July 08, 2013 (PPI-OT): International phosphoric acid prices are spiraling downwards since Jul-12, Fauji Fertilizer Bin Qasim’s (FFBL) phosphoric acid contract price was settled at USD 750/ton for 2QCY13, down 3% QoQ.

According to Arif Habib Limited moreover, the company’s DAP and urea prices remained firmed. In addition the company’s off take posted a healthy growth in 2QCY13, while some decline has been observed in urea the off take on YoY basis, due to high-base effect.

Arif Habib Limited estimates the primary margin of DAP to stand at USD 312/ton in 2QCY13, concluding the company’s gross margin to 32% as compared to 29% during the same period last year.

Company’s Off take remained firm during 2QCY13
The company’s off take remained better, as far as DAP is concerned, which jumped by a massive 74% YoY and 58% QoQ in 2QCY13, however urea off take showed improvement of 47% QoQ but plunged 44% YoY in 2QCY13. The YoY decline in the urea off take is due to the one off sales in June-12, when industry off take clocked in at 1.02mn tons.

Profitability expected to jump 2.3x QoQ
Based on 26 days off take figures, Arif Habib Limited expects the company to post profit after tax of PKR 1,668mn (EPS PKR 1.79) in 2QCY13, up by a massive 2.3x QoQ and 63% YoY, as compared to PKR 1,031 (EPS PKR 1.10) in 2QCY12.

The massive growth in the profitability is on account of propelling DAP margins plus firm DAP prices during the quarter. Better off take of urea and DAP also expected to contribute towards the massive jump in the company’s profitability.

Outlook and Recommendation
The company’s DAP margins massively surged 48% since July-12TD. With the continuous decline in the phosphoric acid prices, Arif Habib Limited expects that, this downward trend will further carry on in CY13, amid an imbalance between input and output prices which will support FFBL’s DAP (primary) margins, going forward.

Arif Habib Limited DCF-based Dec-13 Price Target for the scrip works out to PKR 46/share, translating into an upside potential of 18% from current level. The stock is currently trading at forward PER 5.8x while offering an alluring DY of 13.5% based on CY13E earnings.

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