By: Ismail Iqbal Securities Private Limited
Fauji Fertilizer Limited is expected to announce its full year 2015 result on 27th January, 2016. We expect the company to post 4QCY15 EPS of PKR 3.37 (PAT: 4.3bn), down by 17.7% YoY to take the full year earnings to PKR 12.76/share, a decline of 11% YoY. The strong fall in earnings is mainly due to lower Urea offtake with the 2HCY15 sales remaining down due to confusion over gas and fertilizer prices. Moreover, FFC’s margins also contracted by around 2.5ppts post the hike in gas tariffs and the inability to pass it on the farmers with increased fertilizer prices due to continuous decline in international prices of the commodity. Furthermore, FFC’s other incomes are also expected to fall on the back of lower dividends from its long term investments in AKBL and FFBL and also due to decline in income from bank deposits as the company had paid off its GIDC dues at the end of 1HCY15.
4Q Sales to rebound; Full year EPS to fall: FFC’s earnings remained under pressure throughout the year as it posted weak EPS in the second and third quarter of the year on the back of payment of one-time super tax and due to significantly low Urea sales in the third quarter. Moreover, the hike in gas tariffs along with inability to increase local prices due to continuous decline in international Urea prices also contributed towards the falling gross margin levels of the company. We expect rebound in FFC’s Urea sales in the fourth quarter with the topline expected at PKR 24.4bn, down by 7% YoY. Going forward, any further increase in gas tariffs by the GoP could result in eroding gross margins of the company. However, FFC continues to offer an attractive dividend yield of around 10% in a low interest rate environment. Our target price of the company is PKR 116.7/ share for June 2016 which provides an upside of 6.4% to its previous closing price. Hence, we are maintaining our neutral stance on the stock.