JS Securities Limited - JS Research.

Karachi -- January 13, 2023 (PPI-OT)

Fertilizer Preview: 4Q22 EPS up sequentially; CY22 down YoY

We present earnings estimates for FFC, EFERT and FFBL ahead of CY22 results where we expect the sector to report lower earnings YoY over higher tax charge and exchange loss on foreign payables.

For 4QCY22, we expect a sequential improvement in earnings. Furthermore, we expect both FFC and EFERT to announce dividends of Rs4.00/share, respectively alongside result announcements.

We maintain Overweight stance on the Fertilizer sector as the sector's cash rich position directs at sustainable payouts. Our top picks are FFC and EFERT, offering an average D/Y of almost 19%.

Sequential improvement in 4QCY22 for fertilizer companies

We expect FFC, EFERT and FFBL to report a sequential improvement in profitability premised on stable to higher volumes, with improved margins in DAP sales. We also expect improved profitability over higher base of costs, as FFC and EFERT reported higher repair and maintenance charge during 3QCY22.

Cumulatively, CY22 profits for the sector are expected to decline over deteriorated 9MCY22 profits. To recall, the sector witnessed lower 9MCY22 earnings owing to higher taxes (Super Tax) and higher costs (plant shut downs). Alongside result, we expect dividend announcements from FFC and EFERT, where we expect FFBL to skip the final dividend.

Fauji Fertilizer Company Limited (FFC): FFC is estimated to witness a 2% YoY increase in earnings in 4QCY22 to Rs4.8/share (CY22E EPS: Rs16.5) primarily owing to better gross level performance. Earnings will show an improvement of 17% on a QoQ basis. Additional support is expected to come from other income due to dividend from PMP Morocco and higher income on deposits. FFC showed a 4% YoY decline in offtake during 4QCY22 as its plant was offline for turnaround for 20 days. We expect the company to announce a cash dividend of Rs4.0/share for 4QCY22, taking CY22 DPS to Rs13.0.

Engro Fertilizers (EFERT): EFERT's consolidated earnings for 4QCY22 are projected at Rs3.4/share, a 26% YoY decrease due to lower dispatches. Finance cost for the quarter is expected to remain high given rising interest rates. Earnings are expected to improve sequentially due to better margins in the DAP segment.

EFERT's Base plant, remained offline for turnaround for the most part of...