EFERT: Lackluster volumetric sales dragged profitability
Engro Fertilizers Limited (EFERT) announced its result for 1QCY20 where the company reported a Profit After Tax of PKR 571mn (EPS: PKR 0.43) compared to PKR 6,361mn (EPS: PKR 4.76) in the previous quarter, translating into a decline of 91% on QoQ. The result was slightly below our expectations.
The company recorded net sales worth PKR 10.79bn compared to PKR 43.61 in the previous quarter translating into a decline of 75%. Reduction in volumetric sales was the primary reason for the lower net sales as urea offtake declined by 61% YoY while DAP sales declined by 62% YoY.
Cost of sales also witnessed a dip of 75% on account of removal of GIDC which kept the gross margins largely intact at the 34% vs. 33% in the previous quarter.
Finance cost clocked in at PKR 1,212mn registering a steep increase of 84% on QoQ and 52% on YoY. Elevated finance cost and lower other income due to high base kept net margins under pressure which deteriorated to 5% against 15% in the previous quarter.
The company also held its analyst briefing yesterday where the management shed light on the strategy going forward. Following are the key highlights from the corporate briefing:
Volumetric decline witnessed during the quarter was attributable to higher urea price levels of EFERT within the industry on account of a lower quantum of price reduction post the removal of GIDC. This price parity within the industry subdued the company’s off-take, causing its urea sales to fall down 61% YoY to 160kt and its market share to shrink to 16% during 1QCY20.
The company expects industry sales to hover near its historical average level of 5.8mn MT during CY20 and believes it has the capacity to produce 2.0mn MT. DAP sales declined to 34kT during 1QCY20 causing its market share to fall down to 15%.
The management remains uncertain about the expiry of its concessionary gas with estimates hovering between CY21 and CY24, citing ambiguity regarding the commencement timeline of the concessionary gas. With the decrease in urea prices, EFERT’s profitability is likely to remain under pressure therefore, we main out HOLD stance on the stock.
Engro Fertilizers Limited is a Pakistan-based company, which is engaged in manufacturing, purchasing and marketing of fertilizers. The Company's brands include Engro Urea, Engro NP, Engro DAP, Zingro, Engro MOP, Engro SSP and Engro Zarkhez. Engro NP is the Company's fertilizer brand with Nitrogen and Phosphorous content in equal quantity. Engro DAP primarily contains Di-Ammonium Phosphate, and is imported by Engro EXIMP and marketed by the Company. Engro DAP is marketed in approximately 50 kilogram bags. Zingro is a micronutrient fertilizer, and is imported by Engro EXIMP and marketed by the Company. Engro Zarkhez has Nitrogen, Phosphorous and Potassium, and is primarily offered for sugar cane, fruit orchards, vegetables, potato and tobacco farming. Engro Envy is primarily offered to urban market for gardens, lawns, flower beds, fruit plants and ornamental plants. The Company is a subsidiary of Engro Corporation.
BMA is amongst the leading financial groups in Pakistan. BMA Capital’s core areas of business include Capital Markets, Corporate Finance & Advisory, Asset Management, and Financial Products Distribution. BMA Capital is the leader in privatisation advisory in Pakistan, having successfully advised on over 50% of all privatisations in Pakistan, by value, in transactions valued in excess of US$4 billion. Recent transactions include joint lead managing the $813 million GDR Offering of 10% of OGDCL on the London Stock Exchange in 2006-07, and advising Etisalat on their successful acquisition of a 26% strategic stake in Pakistan Telecommunications Company Limited (PTCL) for US$2.6 billion, the largest M&A transaction and foreign direct investment in Pakistan’s history. The firm is among the top brokers in the Pakistan equity and treasury markets, and is among a handful of firms that comprehensively cover all segments of the capital markets. This is supported by a very strong and independent research capability, which is quoted regularly in both local and international media. BMA Capital’s retail brokerage brand, BMA Trade, has launched a nationwide network of branches as well as a comprehensive online trading platform, enabling investors across Pakistan to take part in the capital markets.
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