Pakistan Fertilizer: High base effect is likely to drag Jun’18 offtake
- Our discussion with fertilizer players highlights a 43% drop in urea offtake (+22% MoM) primarily due to high base effect. On a cumulative basis, total urea offtake during 1HCY18 is projected to clock in at 2.7mn tons, up 1% YoY.
- On the other hand, industry’s DAP offtake is likely to rise 61% YoY in Jun’18. Strong growth in DAP offtake is likely due to late start to kharif sowing this year due to water shortage.
- Domestic urea prices have risen by PKR50-62/bag effective from 2nd –Jul’18. We estimate that this can increase profits of FFC and FFBL by 17% each, whereas profits of EFERT and FATIMA would rise by a relatively modest 11% and 5%, respectively.
- Interestingly, near-term term increase in Int’l urea prices has widened the discount between domestic & Int’l prices to 27% despite increase in domestic price in May’18 and Jul’18. However, sustainability of Int’l urea prices at current levels remains uncertain.
- We maintain our overweight stance on the fertilizer sector and highlight EFERT (TP: PKR83/sh) as our top pick in the sector owing to its (i) low cost structure, (ii) relatively lower sensitivity to gas tariff hike due to concessionary gas and (iii) attractive valuations (1yr forward P/E of 9.4x).
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