Fertilizer earnings future revised as urea offtake set to beat outlook.

Pakistan's leading brokerage house, Topline Securities has revised its earnings forecasts fertilizer companies operating in the country. The upward revision has come on the back of: 1) higher than expected Urea offtake during first ten months of the current calendar year, 2) impact of Gas Infrastructure Development Cess (GIDC) review petition and 3) detailed review of first nine months accounts.

Urea offtake is likely to beat expectations; the brokerage house expects the offtake to rise to 5.8 million tons, in line with last five years average offtake as against its earlier estimate of 5.5 million tons. To note, it had previously trimmed Urea offtake on expectations of supply side disruptions amidst COVID-19 outbreak and impact of locust attack.

Another contributing factor is 48-monthly installments instead of 24 for GIDC payment. The Supreme Court of Pakistan has dismissed review petitions on Gas Infrastructure Development Cess (GIDC). However, as per the verdict, all fertilizer companies can now pay their outstanding amounts in 48 equal monthly installments instead of 24 monthly installments.

All the companies have already accounted for GIDC in their accounts except for EFERT's on its Enven Plant, for which the Company has taken a stay order from the Sindh High Court. Topline has also not taken impact of EFERT's Enven plant in its model.

The brokerage house maintains Buy ratings on Fauji Fertilizer (FFC) and Engro Corporation (ENGRO), Hold on Engro Fertilizer (EFERT) and upgrade Fauji Fertilizer Bin Qasim (FFBL) to a Hold from Sell earlier. It has a Market-weight stance on the sector.

The brokerage house has revised up its earnings forecasts for Fauji Fertilizer Company (FFC) by 28% for 2020 primarily due to increase in Urea offtake estimate by 8% to 2.5 million tons for 2020 from earlier estimate of 2.3 million tons. The brokerage house has also revised up its 2021 and 2022 earnings given that the Supreme Court has allowed GIDC payment over 48 monthly installments instead of 24.

Engro Fertilizers (EFERT) earnings forecast has been revised up by 8-61% for 2020 to 2022 on the back of: 1) revision in Urea offtake estimate for 2020 to 2.0 million tons from 1.7 million tons, 2) one-time tax reversal of Rs2,117 million for third quarter of current calendar year and 3) incorporating the impact of GIDC review petition.

The brokerage house has also revised up EPS forecasts for Engro Corporation (ENGRO) by 5-28% for 2020 and 2022. Revision is...