AKD Securities Limited Equity Research – Daily Report (27-01-2020)

Karachi, January 27, 2020 (PPI-OT): EFERT: CY19 Result Preview

We expect EFERT to post CY19 NPAT of PkR16.7bn (EPS: PKR12.48), down 4% YoY. The YoY decline in earnings is expected on the back of (i) 1.6ppt YoY decline in GMs neutralizing 10% YoY higher topline, (ii) 61% YoY higher operating expenses, (iii) 104% YoY higher finance cost amid policy rate hikes over the last year and, (iv) higher effective tax rate of 36% (vs. 28% in the same period last year) due to reversal of deferred tax booked previously. For 4QCY19 alone however, EFERT is expected to post 85% QoQ higher earnings of PkR6.2bn (EPS: PkR4.61). The uptick in NPAT will result from (i) 39% QoQ higher offtake leading to 63% increase in topline, (ii) 106bps QoQ higher GMs led by higher urea retention price (effective Sep’19) to pass-on higher gas cost and (iii) lower effective tax rate of 28% expected vs. 44% in 3QCY19 (reversal of deferred tax asset booked in 3Q). EFERT has already paid PkR11.0/sh payout in 9MCY19 vs. PkR8.0/sh in 9MCY18, limiting chances of announcement of a final cash dividend. Our TP implies a total return of 22% at last close, as our estimates incorporate current gas and urea prices. However, while ECC is mulling over the gas price increase proposals, we advise investors to remain on sideline until further clarity on gas prices’ front.

FFC: CY19 Result Preview

Fauji Fertilizer Company Ltd (FFC) is scheduled to announce its CY19 financial results on 30th Jan’20. We expect FFC to post 29% YoY higher CY19 NPAT of PkR18.6bn (EPS: PkR14.61). The increase in earnings is expected on the back of (i) 205bps YoY higher GMs amid flattish topline, (ii) and 85% YoY higher ‘other income’ backed by interest earned on GIDC accumulation and higher dividend income. However, (i) 39% YoY higher finance cost due to increase in discount rates and (ii) 40% YoY higher other expenses will keep the bottomline growth in check. For 4QCY19 alone, the earnings are expected to clock in at PkR6.1bn (EPS: PkR4.81), up 4/72% YoY/QoQ. The sequential increase in earnings is expected on the back of: (i) 23% QoQ higher topline resulting from 19%QoQ higher urea offtake, and (ii) 537 bps QoQ higher gross margins of 31% amid higher retention price. FFC is also expected to announce a final interim cash dividend of PkR4.0/sh, taking CY19 payout to PKR11.55/sh vs. PKR8.85/sh during CY18. Our TP of PkR111/sh implies an upside of 5% and total return of 14.6% at last close, implying a Neutral stance.

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