As per industry sources, FFC registered urea offtake of ~570k tons during Jun’12, turning out to be a big beneficiary of price reduction strategy led by itself where dealers’ price arbitrage anticipation drove the volumetric sales. Resultantly, total urea offtake for 2QCY12 is expected to register at 850k tons, up by a significant 2.6xQoQ. We estimate FFC to post NPAT of PkR6.4bn (EPS: PkR5.06), up by an encouraging 66%QoQ, in 2QCY12 where DPS of PkR4.5-5.0 is expected to supplement the 2QCY12 results. In this regard, 1HFY12 NPAT is forecast to stand at PkR10.3bn (EPS: PkR8.1), up 26%YoY. At current levels, we retain ‘Buy’ recommendation on FFC with Dec’12 TP of PkR144/share, implying a 23% upside.
2QCY12 to post superb earnings amidst urea price cut: We expect FFC to post an NPAT of PkR6.4bn (EPS: PkR5.06) in 2QCY12, up 66%QoQ, on the back of a spurt in urea offtake, estimated at ~850k tons compared with just 329k tons last quarter. As a result, we expect FFC to have nearly completely liquidated its urea inventory at 2QCY12 end. Gross margin for 2QCY12 is expected to dip by 1.4ppt QoQ due to decline in urea price. Financial charges are also forecast to remain a tad higher (+9%QoQ) due to the inventory pile up during most of the quarter (urea sales skewed towards the end of the quarter). Lower other income at PkR437mn (- 80%QoQ), is expected to drag a superb quarter’s earnings as FFBL did not announce dividend in last quarter. NPAT for 1HFY12 is expected at PKR10.3bn, up by a significant 26%YoY. Given the unchanged urea offtake over corresponding period (up by a modest 0.4%YoY), primary driver of sequential improvement in earnings is higher urea prices in 1HFY12 compared to 1HFY11; however, gross margin is expected to contract by 7.1pptYoY due to higher gas prices, specifically feedstock (GIDC imposition).
Investment Perspective: FFC is trading at attractive CY12and CY13 dividend yields of 13.5% and 16.7%, respectively, under our base case scenario which assumes 125k tons closing inventory at CY12 end. Key upside could come in the form of ENGRO initiated urea price hike, where ENGRO may contemplate a urea price hike given the cash flow constraints arising from Enven plant closure and the debt repayments. Currently, we retain our liking for FFC (trading at CY12F and CY13F P/E multiples of 7.3x and 6.0x), while the scrip offers an upside of 23% to our Dec-end TP of PkR144/share.
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