AKD Securities Limited Equity Research – Daily Report

Karachi, March 19, 2019 (PPI-OT): Pakistan Fertilizer: Cautious optimism on price hike

As per our channel checks, Fauji Fertilizer Company Ltd (FFC) has increased Urea prices by PKR80/bag to PKR1,820/bag. The price increase comes on the back of expected demand pick up in the up-coming Kharif season, amid low inventory levels, in our view (Urea inventory Jan’19: 70K tons).

The recent price hike is still short of justified Urea price as per Fertilizer players, who claim to have been absorbing approximately 90% of the GIDC imposition impact. The deadlock situation on GIDC settlement, meanwhile, is likely to continue as GoP demands Urea price reduction accompanying 50% GIDC waiver.

In this regard, the GoP may collect approximately PkR30bn from the Fertilizer sector in the form of GIDC. In comparison, creating Urea surplus situation through imports or LNG based production may require PkR9-10bn out of national kitty, which seems unlikely, considering the dismal fiscal situation.

While this price hike bodes well for AKD Fertilizer Universe (will lift CY19 earnings estimates by 15/9/34% for FFC/EFERT/FFBL – assuming prices are increased sector-wide, which is usually the case), we remain skeptical over the price increase and await further clarification on GIDC before incorporating it in our estimates.

Amid this background, we highlight that FFC is better positioned with regards to the GIDC (complete pass-on of GIDC impact to be neutral), and, is expected to be the prime beneficiary if the recent Urea price hike sustains. FFC trades at CY19/20 P/E of 7.9/7.7x and offers a D/Y of 10.5%.

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