IGI Securities Limited – Day Break (27-01-2020)

Karachi, January 27, 2020 (PPI-OT): Fertilizer – FFBL and FFC 4QCY19 Earnings Preview

Fauji Fertilizer Bin Qasim Company Limited (FFBL) is scheduled to announce its financial result for 4QCY19 on 28th Jan-20 where we expect company to report a profit of PKR 907mn (EPS: PKR0.97).

Fauji Fertilizer Company Limited (FFC) is scheduled to announce its financial result for 4QCY19 on 30th Jan-20 where we expect company to report a profit of PKR 5.5bn (EPS: PKR4.38).
FFBL: Earnings of PKR 0.97/share expected for 4QCY19

Fauji Fertilizer Bin Qasim Company Limited (FFBL) is scheduled to announce its financial result for 4QCY19 on 28th Jan-20 where we expect company to report a profit of PKR 907mn (EPS: PKR0.97), down 45%y/y. This takes total loss to PKR 2.5bn (LPS: PKR 1.62) for CY19 compared to profitability of PKR 1.4bn (EPS: PKR 1.54) witnessed last year. We expect company to announce a cash dividend of PKR 0.6/share for the whole year.

Higher finance cost and decline in other income support to act as a drag

We attribute the drop in earnings for the quarter in review primarily to high finance cost, decline in other income and dip in DAP sales. Top line is estimated to inch down by 2%y/y on the back of 13%y/y drop in DAP sales. Moreover, other income is estimated to slide down by 72%y/y owing to nil dividends from subsidiaries, we think. Major drag to income may come from increase in finance costs (owing to increased borrowings and high interest rates) pushing profitability down by 2.4xy/y

Recommendation

We have a “BUY” call on the scrip based on our Dec-20 target price of PKR 25/share offering +19% upside from its last closing. The company is currently trading at CY20 P/E of 28x, offering a dividend yield of 3%.

FFC: Earnings of PKR 4.38/share expected for 4QCY19

Fauji Fertilizer Company Limited (FFC) is scheduled to announce its financial result for 4QCY19 on 30th Jan-20 where we expect company to report a profit of PKR 5.5bn (EPS: PKR4.38), down 6%y/y. Accordingly, for the whole year CY19, earnings may increase by +25%y/y to PKR 18bn (EPS: PKR14.2). We expect company to announce a cash dividend of PKR 3.50/share during the quarter, taking total pay out to PKR 11.05/share for CY19.

Drop in DAP sales and other income to decrease earnings during the quarter

We attribute 6%y/y drop in earnings for the quarter in review primarily to high finance cost, decline in other income and significant dip in DAP sales. Top line is estimated to inch down by 8%y/y on the back of 61%y/y drop in DAP sales. However, gross profit may increase +9%y/y led by improved margins and better pricing power. On the flip side, we expect other income to fall down by 26%y/y with income from short term investments being the only support as against dividend income received from subsidiaries during the same period last year. Moreover, increase in borrowings (2.0xy/y) may also lead to higher finance cost further dragging earnings by 27%y/y during the 4QCY19, we think.

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