Pakistan Fertilizer: Robust margins likely to deliver strong 2Q earnings
- Rising local and int’l fertilizer prices have greatly improved the margin and profitability outlook of the fertilizer sector, in our view. While CY17 witnessed demand supply rebalancing, CY18 brings with it the promise of margin recovery which have been under pressure during the past three years.
- During 2QCY18, we expect BMA fertilizer universe to post earnings of PKR8.14bn, a rise of 60% YoY. Improved prices coupled with stable major input cost (gas tariff unchanged) and 16% drop in financial charges on the back of reduction in working capital requirements should propel sector profits by 60% YoY.
- Within BMA fertilizer space, Fauji Fertilizer Bin Qasim Ltd (FFBL) and Fatima Fertilizers Limited (FATIMA) are likely to outperform the wider sector where FFBL is expected to turn profitable in 2Q (EPS: PKR0.44) after posting losses in 1Q18 and 2Q17; whereas, FATIMA is projected to post EPS of PKR1.35, up 1.5x YoY
- While we acknowledge potential drag from gas tariff hike, profitability of the industry may not suffer much given improving pricing power. Additionally, fertilizer makers with low cost structure such as Engro Fertilizers Limited (EFERT) and FATIMA will likely dodge the bullet completely.
- We highlight EFERT (TP: PKR83/sh) and FATIMA (TP: PKR37/sh) as our top picks in BMA fertilizer space due to their low cost structure and relative immunity of these companies to gas tariff hike.
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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