FFC – Margin expansion + higher dividend income prop up 1QCY11 earnings

1QCY11 EPS at PKR4.84; DPS at PKR4.50: Recently, FFC announced its financial result for 1QCY11, where the company posted PAT of PKR4.1bn (EPS: PKR4.84), up 51% YoY. Earnings growth primarily emanated from strong margins coupled with higher dividend income from FFBL. While earnings lagged market consensus by 8%, it was a mere 3% lower than Elixir estimates. Moreover, the company announced first interim cash dividend of PKR4.50/share.

Top-line up 17% YoY despite 13% YoY decline in volumes: Despite 13% decline in Urea sales during the quarter, top-line increased to PKR11.1bn, up 17% YoY mainly on the back of higher prices. Urea prices averaged at PKR1,113/bag, up 37% YoY during 1QCY11, while gross margins expanded more than 10% over the previous year to 53%.

Surge in other income drove earnings growth: Other income grew by 56% YoY to PKR1.9bn during 1QCY11, due to stellar CY10 final dividend (PKR3.5/share) from FFBL, booked during the quarter.  Dividend income from FFBL contributed PKR1.77/share on after tax basis to FFC’s 1QCY11 EPS, as opposed to PKR1.13/share last year.

Investment perspective: At yesterday’s closing price of PKR138.8/share, the scrip trades marginally above our Dec-11 PT, with CY11E PER and dividend yield of 7.7x and 11% respectively. HOLD

Top-line up 17% YoY despite 13% YoY decline in volumes

Urea dispatches for the quarter declined by 13% YoY to 546k tons due to gas curtailment and plant turnaround. Despite decline in volumetric sales, net sales registered an increase of 17% YoY mainly on the back of higher fertilizer prices. Urea prices averaged at PKR1,113/bag, up 37% YoY during 1QCY11. However on QoQ basis, top-line plunged by 32% YoY to PKR11.1bn which was due to lower dispatches as against 4QCY10, which was the peak Rabi quarter. Higher Urea prices led gross margins to expand by 10% to 53% during 1QCY11, as opposed to 43% during the same period last year.

Surge in other income drove earnings growth

FFBL’s CY10 final dividend at PKR3.5/share was up 56% YoY, which propelled 1QCY11 other income by a similar quantum for FFC to PKR1.9bn. Dividend income from FFBL, which reflects in FFC’s earnings with a quarter’s lag, contributed PKR1.77/share on after tax basis (36%) to FFC’s 1QCY11 EPS, as opposed to PKR1.13/share (35%) last year.

Investment Perspective

At yesterday’s closing price of PKR138.8/share, the scrip is fairly valued given our DCF based December-11 PT of PKR138/share and trades at CY11E PER of 7.7x and offers CY11E dividend yield of 11%. HOLD

Economic & Political News

SBP opposes increase in tax rate on banks and insurance firms

The State Bank of Pakistan (SBP) has opposed the government’s move to increase tax rate for banks and insurance companies from 35% to 37.5%. The Federal Board of Revenue (FBR) has proposed increase in the tax rate on banks on the ground that banking spread – the difference between lending and deposit rates – has increased significantly. Currently, the average spread is 7.2% and the maximum is over 10%.

FBR wants cut in corporate income tax rate for listed companies

The Federal Board of Revenue (FBR) has proposed reduction in the upcoming budget for 2011-12, in corporate income tax rate for public listed companies from 35% to 32.5% and for private limited companies from 35% to 34%.
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