EFERT: Armored against sector headwinds, (AKD Daily, Sep 30, 2020)
AKD Daily
EFERT: Armored against sector headwinds
- EFERT’s 2QCY20 result remained below market consensus, despite a significant 52% YoY uptick in urea offtake, due to one-offs including: (i) 83% YoY decline in other income, and (ii) 2.1xYoY higher other expenses.
- As per our back of the envelop calculation, assuming 100% of dealers are not registered in sales tax, disallowing 10% expense deduction could imply negative earnings impact of approximately PkR2bn p.a. (EPS impact: PkR1.50) for EFERT, which has provisioned for PkR630mn impact in its 2Q earnings.
- The said measure is due to be effective from Oct 1, 2020 however, our correspondence with industry players suggest companies being in talks with the Government to exempt the sector from such measures. We await clarity on this regard before incorporating it in our model which would yield a negative earnings impact of 4% over CY21-25F, on average in case of no pass-on.
- As urea inventory has normalized from its peak of 1mn MT to approx. 300K MT levels, the fertz players would likely pass-on any negative hit from the aforementioned measure in terms of further urea price hike (PkR20-25/bag to be a neutral event for EFERT, which has already increased PkR25/bag in Aug’20).
- Despite comfort on impact of sector headwinds on EFERT, we maintain our Sell stance on the stock, as the end of concessionary gas agreement approaches (CY23), post which D/Y will narrow down from 13% at present to 8%.
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