Morning Call about Fauji Fertilizer Company Limited – Arif Habib Limited

Karachi: Higher urea price lead to record profitability

Earnings double amidst record urea prices

Fauji Fertilizer Company Limited (FFC) reported a 104% jump in net income in CY11 to PKR 22.5bn (EPS: PKR 26.52) compared to PKR 11bn (EPS: PKR 13.0) in CY10.

According to Arif Habib Limited, the company also announced a final cash dividend of PKR 5.25/share and a bonus of 50%, taking the year’s cash payout tally to PKR 20.0/share, translating to a payout of 75%. The improved performance is primarily due to a 70% rise in average urea retail price during CY11 and higher other income earned by the Company.

Earnings are up by 53% QoQ in 4QCY11

During the last quarter of CY11, FFC posted a 53% QoQ jump in net income, which was recorded at PKR 8.7bn (EPS: PKR 10.21). The Company posted an increase in revenue of 17% QoQ to PKR 16.7bn in 4QCY11 (3QCY11: PKR 14.3bn). Margins were boosted to an impressive 74% during the quarter as compared to 58% in 3QCY11. Operating profitability of the Company grew by 60% QoQ to PKR 10.4bn in 4QCY11.

 

Financial Highlights
PKR mn CY11 CY10    YoY   4QCY11    3QCY11  QoQ
Sales 55,221  44,874 23% 16,689   14,311  17%
Cost of sales    20,872   25,310   -18%   4,332    6,012  -28%
Gross profit   34,349 19,564 76%    12,357   8,229 50%
Distribution cost    4,372 3,944 11%  1,119   1,088    3%
Operating profit 27,322  14,243 92%   10,374  6,472   60%
Finance cost  786  1,087  -28%  183 131 40%
Other income 6,630  3,153 110%  2,237 1,511   48%
Profit before taxation  33,166 16,310 103% 12,428   7,921  57%
Taxation 10,674   5,281  102%  3,771  2,275   66%
Profit after taxation   22,493 11,029 104% 8,658   5,646  53%
EPS (PKR) 26.52   13.01    10.21 6.66
Gross Margin    62% 44% 74% 58%
Operating Margin 49%    32%    62%  45%
Net Margin  41%   25%    52%  39%
Source: Company accounts & AHL estimates

 

Margins soar to new highs

FFC’s gross margin was in line with Arif Habib Limited’s estimates and was recorded at 62% in CY11 (CY10: 44%). During the year under review, FFC’s production declined marginally by 4% to 2.4mn tones. This was due to 12% gas curtailment on the Mari Gas network. Higher urea prices however, ensured that revenues increased by 17% YoY, resulting in the Company posting gross profit of PKR 34.3bn, a 76% improvement YoY. The price hike followed substantial gas curtailments to urea manufacturers on the Sui network. During CY11, FFC also ceased to purchase/import urea for resale.

Higher other income and lower financial charges augmented bottom-line

FFC’s other income more than doubled in CY11 and clocked in at PKR 6.6bn. Dividend income from its subsidiary company, Fauji Fertilizer Bin Qasim (FFBL) came to around PKR 4.75bn, and had a per share impact of PKR 7.00 during the period under review. Simultaneously, the Company’s finance cost declined by an  impressive 28% YoY to PKR 786mn in CY11, thus further working in the favor of equity investors. This reduction was mainly due to lower short term borrowings since soaring margins substantially improved the Company’s cash flows.

Arif Habib Limited still sees sizeable upside potential

The stock price has increased by more than 25% since the start of CY12. However, as per Arif Habib Limited’s DCF-based Dec-12 target price of PKR 217.4, the stock still offers an upside potential of 16% from the current price of PKR 187.1. The stock offers further enticement in the form of a 9.2% dividend yield and a PER of 8.2x. Arif Habib Limited thus maintains Arif Habib Limited’s ‘Buy’ recommendation on the scrip.

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