FFBL – 1HCY11 earnings to rise 103%; time to go ‘All in’!

1H EPS anticipated at PKR3.74, up 103% YoY: Fauji Fertilizer Bin Qasim Limited (FFBL) is expected to announce its 2QCY11 financial result, where we expect the company to post PAT of PKR1.9bn (EPS: PKR2.07), up 112% YoY. This will translate into 1HCY11 PAT of PKR3.5bn (EPS: PKR3.74), up 103% YoY. We also expect the management to announce second interim dividend of PKR2.00/share, taking its aggregate payout to PKR3.00/share.

Top-line up 49% YoY on higher prices and dispatches of DAP: Despite lower dispatches of Urea (-11% YoY) during 1HCY11, we anticipate net sales to register a surge of 49% YoY on the back of higher DAP dispatches and fertilizer prices.  Simultaneously, on QoQ basis, we estimate net sales to increase by 82% YoY.

Gross margins expected at 36%, up 400bps YoY: Currently, DAP primary margins are prevailing at USD330/ton, as a result of which gross margins increased by 400bps to 36% during 1HCY11. We anticipate DAP primary margins at USD280/ton for CY11 while maintaining our long term assumption of USD200/ton.

Investment perspective: We have revised our June-12 PT for FFBL upwards to PKR51/share on the back of higher fertilizer prices and upward revision of DAP primary margins for CY11 to USD280/ton, however we keep our long-term assumption fixed at USD200/ton. At current levels, the scrip offers potential upside of 15%, while trading at CY11E P/E multiple of 5.3x and CY11E dividend yield of 17.8%. BUY!

Top-line up 49% YoY on higher prices and dispatches of DAP

Despite anticipating 11% YoY decline in Urea dispatches to 231k tons during 1HCY11, we expect net sales of FFBL to register an increase of 49% YoY to PKR17.8bn. This increase will primarily emanate from 29% YoY increase in DAP sales to 205k tons and higher fertilizer prices. Urea and DAP prices (net of sales tax) have witnessed an increase to PKR1,135 (+33%YoY) and PKR3,460 (+34% YoY) respectively. Top-line for 2QCY11 shall witness a phenomenal surge of 82% YoY to PKR9.7bn on the back of higher DAP sales and fertilizer prices.

Gross margins expected at 36%, up 400bps YoY

We expect the company to register 400bps increase in gross margins to 36% during 1HCY11, where DAP primary margins averaged USD330/ton during the period. Phosphoric acid prices are expected to increase to USD1,050/ton for 3Q, while we expect DAP prices to rise by PKR170/bag and offset 56% of the increase in phosphoric acid cost, given its price sensitive nature. Resultantly, DAP primary margin for 2HCY11 would settle at USD250/ton taking CY11 average to USD280/ton. We maintain our long term assumption at USD 200/ton.

Investment perspective – Time to go ‘All in’!

We have revised our June-12 PT for FFBL upwards to PKR51/share on the back of upward revision of DAP primary margins for CY11-13. We have increased our CY11 DAP primary margin to USD280/ton (+USD25), while also increasing our DAP primary margin assumption for CY12/13 to USD250/ton (+USD25) and USD225/ton (+USD25), respectively. As a result, we have revised up our CY11-13 EPS estimates by 20% to 28% while also increasing our DPS estimates by 20% to 28%.  At current levels, the scrip offers possible upside of 15%, while trading at CY11E P/E multiple of 5.3x and CY11E dividend yield of 17.8%. BUY!

Economic & Political News

Consensus reached: CNG prices likely to rise by Rs7 to PKR8/kg

The Ministry of Petroleum has agreed with the proposed increase in compressed natural gas (CNG) prices by PKR7 to PKR8/kg, worked out by the Oil and Gas Regulatory Authority (Ogra), which will take CNG prices to 55% of petrol price.

Govt to privatise, sell shares of eight units

The government has finalised plans to privatise and sell shares of 8 state-owned enterprises during the current fiscal year, said Privatisation Minister Ghaus Bakhsh Mahar on Tuesday. Talking to the media, he said shares of Kot Addu Power Company (Kapco), Habib Bank (HBL), Pakistan Petroleum (PPL) and National Bank would be sold through domestic stock markets whereas management control of Heavy Electrical Complex (HEC), National Power Construction Company, Faisalabad Electric Supply Company (Fesco) and SME Bank would be handed over to the private sector.
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