Karachi, March 05, 2013 (PPI-OT): Though an awful year for the fertilizer sector came to an end, clouds of uncertainties still roam around the sector.
According to Arif Habib Limited among many issues, with respect to the fertilizer sector, gas remains on top. Companies on SNGPL’s network suffered the most, with complete gas shutdown for almost 290 days. However, safe bet can be made on the companies operating on the MARI’s network. Arif Habib Limited has done a yearly financial performance analysis 2012 of Arif Habib Limited fertilizers universe.
Total urea off take for CY12 turned down 12% YoY to stand at 5.2mn tons, however, Arif Habib Limited fertilizers sample’s sales rose 7% YoY. These incremental sales were mainly on account of higher urea prices (+17% YoY in CY12) during the year. On the other hand, gross margins of the sample plunged a massive 1300bps during the year, from 50% in CY11 to 37% in CY12. This decline in gross margins was mainly due to upsurge in feed stock and fuel stock prices by massive 207% YoY and 17% YoY, respectively. This decline in gross margins translates net margins in to 15% in CY12, from a high of 27% in CY11.
Arif Habib Research Fertilizer Universe (FFC, FFBL and ENGRO)
|Financial Highlights(PKR mn)||CY12||CY11||YoY|
|Total Off take (k tons)|
|Profit before tax|
|Profit after tax|
Source Company Financials, Arif Habib Research
Better earnings in 4Q, supporting CY12 earnings
As the commencement of Rabi season in the last quarter, along with expected increase in gas prices from Jan-13, urea off take during 4QCY12 was boosted up by 55% QoQ (in the expectation of increase in urea prices as seen in Jun-12).
Company-wise profitability analysis 2012
FFC remained the top pick in Arif Habib Limited fertilizers sector sample, as its off take remained intact at 2.4mn tons in comparison with the last year. FFC’s bottom-line was marginally down 7% YoY to PKR 20.84bn in CY12.
On the other hand, FFBL faced complete shutdown of gas in 1QCY12, leading to gross loss during the quarter. However, FFBL’s profitability jumped back, primarily due to prospering primary margins on DAP (increase in local prices while decrease in int’l prices). FFBL’s bottom-line plunged 60% YoY to 4.3bn in CY12; the reduction was mainly due to the lower sale and production of urea.
ENGRO was the key victim of gas curtailment during CY12; with its new plant remained un-operational during 1HCY12 (arrangement was done in the 2HCY12 for diversion of gas to EnVen from base plant due to annual turnaround total urea off take plunged 25% YoY to 0.9mn tons while production was also contracted by 22% YoY in CY12. Engro Fertilizer recorded net loss of PKR 2.9bn in CY12, mainly owing to gas curtailment and immense finance cost burden.
Source: Company Accounts, Arif Habib Research
Outlook and Recommendation
As long term gas plan is on the cards, for the plants operating on the SNGPL network, the new ray of hope would translate its favourable impact on fertilizer sector in general, and ENGRO in particular. However, some ambiguities are still there which includes 1) final sale price of gas, which includes tolling charge and gas sale price. 2) capital expenditure of laying the pipe-line from Kunnar Pasaki Deep to Qadirpur, which would eventually add up to the SNGPL network. The overall situation would be clear once the GSA would be signed between ENGRO and OGDCL.
Currently, Arif Habib Limited has a ‘Hold’ stance on the three of Arif Habib Limited samples companies. However any update on the GSA would lead us to revise the earnings estimates and price
targets of Arif Habib Limited companies.