Fauji Fertlizer Bin Qasim Limited; Primary margins to propel 4QCY12 profitability- Arif Habib Research
Primary margins on fire
International phosphoric acid prices are headed downwards since Jul-12 after staying in the upward direction for quite a while. Fauji Fertilizer Bin Qasim Limited’s (FFBL) phosphoric acid contract price (basic raw material for DAP) was therefore settled at USD 850/ton for 4QCY12, down 5% QoQ. On the other hand, DAP prices were jacked up by the company at the start of last quarter (Oct-Dec12) by PKR 100/bag. Thus, we estimate the primary margin of DAP to clock in at USD 284/tons leading to improve gross margins by a solid 663bps in 4QCY12
Uniformity in DAP offtake
As per the provisional figures Fauji Fertilizer Bin Qasim Limited’s DAP offtake is expected to be marginally down by 7% QoQ, largely due to high base-effect of Sep-12 sales. Conversely, 14% increase in Wheat support price (to PKR 1,200/maund) is expected to have supported DAP offtake in 4QCY12 (especially in the month of Nov-12).
Our initial estimates suggest (based on 23-day extrapolated sales figures for Dec-12) the company would post an EPS of 2.05/share in 4QCY12, substantially up by 29% QoQ, translating into full-year CY12 earnings to PKR 4.33/share. The massive growth in 4QCY12 is expected to be mainly driven by soaring primary margins of the company. This should lead to overall improved gross margins for the company.
DAP’s pricing scenario to remain undeterred
Fauji Fertilizer Bin Qasim Limited increased DAP prices by PKR 100/bag (3% QoQ) effective from 1st of Oct-2012, which alongside declining phos-acid prices, should jack up company’s margin. We expect the company to carry on with the increased price levels in 1QCY13 as well. Thus, we also expect the gas price increase, from 1 Jan 2013, to be passed on to consumer with an estimated per bag impact of PKR 10/bag. However, with no pass-on to consumer, the price impact should translate an annualized EPS impact PKR 0.09 (1.3%) on full-year CY13 earnings.
Urea treated as a third wheel
Despite additional gas curtailment on the SSGC network during the winter season, FFBL faces the same 45% gas curtailment just as during the year, so the company stands at with relative advantage to its sector peers who on the SNGP network. We expect gas curtailment to the company remain at same levels, except the complete shutdown period in the month of January, which could also be expected to be lessened provided strong lobbying by the company.
According to our estimations, Fauji Fertilizer Bin Qasim Limited is expected to announced a final dividend of PKR 1.95/share, taking total cash payouts for CY12 to PKR 4.20/share, an increased total expected cash payout of 97% against 88% last year.
Outlook and Recommendation
We expect phosphoric acid prices to further plunge in CY13 on account of excess supply and relatively subdued demand, that should support FFBL’s DAP (primary) margins, going forward. Our DCF based Jun-13 Price Target for the scrip works out to PKR 41, translating into an upside potential of 6.1% from current level. The stock is currently trading at forward PER 5.8 while offering a tempting DY of 15% based on CY13E earnings.