Morning Call about Result Preview Chemicals – Arif Habib Limited

Karachi, July 09, 2012 (PPI-OT): FFC: 2QCY12 profitability set to spike amidst record sales

The meeting of the board of directors of Fauji Fertilizer Company Limited (FFC) is scheduled to be held in the third week of Jul-12, to approve the financial results for 1HCY12.

Earnings poised to grow by 55% QoQ in 2QCY12 on back of strong sales Arif Habib Limited expects FFC to post a profit after tax (PAT) of PKR 6.0 billion (EPS: PKR 4.73) in 2QCY12, which is 55% higher than PAT of PKR 3.9 billion (EPS: PKR 3.05) recorded in the preceding quarter.

According to Arif Habib Limited, 1HCY12’s bottom line is consequently expected to rise to PKR 9.9 billion (EPS: PKR 7.77), depicting a healthy growth of 21% YoY. The improved earnings can be attributed to record Jun-12 sales, which alone are estimated to be close to a record 540 kTons on account of pre-buying by dealers fearing another price hike. This is expected to take quarterly volumetric urea sales to around 820 kTons, and 1HCY12 offtake to 1.15 million tons. As a result of the phenomenal sales volume, Arif Habib Limited anticipates FFC’s top line to rise by 111% QoQ in 2QCY12 to PKR 24.1 billion, taking 1HCY12’s net revenues to PKR 35.5 billion, which are higher by 47% YoY. Arif Habib Limited expects the Company to announce an interim cash dividend of PKR 4.25 per share.

Financial Highlights
PKR million2QCY121QCY12QoQ1HCY121HCY11YoY
Net sales

24,076

11,433

111%

35,509

24,221

47%

Gross profit

12,193

5,758

112%

17,951

13,693

31%

Distribution cost

2,268

1,340

69%

3,608

2,166

67%

Operating profit

8,807

3,896

126%

12,703

10,406

22%

Other income

338

2,141

-84%

2,479

2,882

-14%

Finance cost

302

278

9%

580

471

23%

Profit before tax

8,843

5,759

54%

14,602

12,817

14%

Tax

2,830

1,884

50%

4,714

4,628

2%

Profit after tax

6,013

3,875

55%

9,888

8,189

21%

Earnings per share (PKR)

4.73

3.05

7.77

6.44

Source: Company Accounts and AHL Estimates

Lower other income to prove dampener in an outstanding quarter

The Company’s other income is estimated to fall by 84% QoQ to PKR 338 million in 2QCY12. This is on account of no dividend announcement by FFC’s subsidiary company FFBL in the previous quarter. Dividend income from FFBL typically comprises 20% (5-yr average) of FFC’s bottom line, and the (low) expected figure for the quarter under review is a testament to the performance of the Company’s core business operations.

Recommendation

From last closing of PKR 116.3 per share Arif Habib Limited highlights a potential upside of 24.5% to Arif Habib Limited’s DCF based Dec-12 target price of PKR 144.9 per share. Arif Habib Limited thus reiterates Arif Habib Limited’s liking for the stock of FFC and recommend a ‘Buy’ stance on the scrip. The stock is currently trading at a CY12E PER of 6.9x and offers a dividend yield of 14.2%.