FFC – Strong 2Q likely due to margin gains and higher dividend income

25% YoY increase in Urea retention prices to prop up gross margins: Urea prices increased to PKR1,275/bag in 2QCY11. However, excluding sales tax impact urea price would likely have been PKR1,071/bag, up 25% from 2QCY10 average price of PKR858/bag. While we expect 1% YoY decline in Urea sales during 2QCY11, higher urea prices shall more than offset the impact as we estimate gross margins to increase by 700bps to 53% during 2Q.

DPS of PKR1.25 (+150% YoY) to be received from FFBL in 2Q: FFBL announced a DPS of PKR1.25/share during the 1Q, up 150% YoY which will be received by FFC in 2QCY11, thus further boosting 2QFY11 bottom-line. Dividend income from FFBL shall contribute PKR0.63 to FFC’s 2QCY11 EPS.

2QCY11E EPS expected at PKR~4.4: Our initial estimates suggest an EPS of PKR~4.4 for 2Q, up 57% YoY. We also expect a DPS of PKR4.25 in 2QCY11. At yesterday’s closing price, the scrip trades at CY11E P/E multiple of 8.2x and offers CY11E dividend yield of 10.4%.

25% YoY increase in Urea retention prices to prop up gross margins

While we expect 1% YoY decline in Urea sales during 2QCY11, higher urea prices and the resulting strengthening in gross margins shall more than offset the impact of lower volumes.  We estimate gross margins to increase by 700bps to 53% during 2Q. Urea price increased to PKR1,275/bag in 2QCY11 as manufacturers transferred the entire burden of sales tax imposition on to the farmers. Excluding sales tax impact urea prices would likely have been PKR1,071/bag, up 25% from 2QCY10 average price of PKR858/bag. Firm outlook on prices due to limited supply and gas curtailment is expected to keep margins strong. Not to ignore the recent rise in international prices to USD440/ton in April-11 from USD350/ton in Mar-11, which increases the discount of local price to 32%, hence providing room to manufacturers to increase prices in case gas situation worsens.

DPS of PKR1.25 (+150% YoY) to be received from FFBL

FFC’s 2Q bottom line will get a further push from dividends to be received during the quarter from FFBL. FFBL announced a DPS of PKR1.25/share during the 1Q, up 150% YoY which will be received by FFC in 2QCY11. Dividend income from FFBL shall contribute PKR0.63/share to FFC’s 2QCY11 earnings on after tax basis, and hence 2Q other income would increase by 183% YoY to PKR744mn.

Gas diversion from power to fertilizer at 2/3 cost of gas –HSD differential unlikely to materialize

FFC has been the key beneficiary of the recent increase in gas curtailment where manufacturers jacked prices to offset lost contribution margin from lower volumes. FFC being on Mari network, witnessed minimal curtailment, while it enjoyed the benefits of higher prices. Our channel checks suggests that recent proposal to divert 40mmcfd gas from power to fertilizer sector in lieu fertilizer sector bearing 2/3 of the gas-HSD cost differential for electricity generation has been put on ice as FFC did not agree to contribute its share to the gas-HSD differential. Fertilizer sector had proposed to recover the gas-HSD cost differential through raising Urea prices. FFC’s agreement to the proposal would have made it the first instances where FFC would have shared the loss from lower gas availability on Sui network.

2QCY11E EPS likely at PKR~4.4

FFC will most likely announce its 2QCY11 financial result by the end of July-11, where our initial estimates suggest an EPS of PKR~4.4 for 2Q, up 57% YoY. Moreover, we expect the company to announce a dividend of PKR4.25/share. At yesterday’s closing price, the scrip trades at CY11E P/E multiple of 8.2x and offers CY11E dividend yield of 10.4%.

Economic & Political News

OGRA issues notices to six oil marketing companies

Oil and Gas Regulatory Authority (OGRA) here on Monday issued notices to six oil marketing companies for shortage of required stocks at their oil deptos in various parts of the country. According to sources in OGRA, six oil marketing companies were issued notices including Attock Petroleum Limited, Byco, Hascol Petroleum Limited, Overseas Oil Trading Company Limited (OOTCL), Askar. An emergency meeting of the member oil has been called on Tuesday in which Executive Director Oil and Executive Director Enforcement would participate and discuss further process to suspend their licence.

Engineering and construction: OGDCL may award gas field contract to Kahuta Labs

The board of directors of Oil and Gas Development Company Limited (OGDCL), which is scheduled to meet today (Tuesday), is likely to accord formal approval to the award of USD186mn engineering, procurement and construction contract for Uch-II oil and gas field to state-run Kahuta Research Laboratories (KRL).
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