EUR 4.62 For Business Accounts Only

Fatima Fertilizer: One-offs disguise 2Q earnings weakness; Neutral sources

• We trim our TP FOR FATIMA by 5% to PkR37/sh, while maintaining our Neutral stance. The revision reflects (i) deteriorating earnings quality and (ii) depressed off-take outlook given sufficient Urea/CAN inventory, ECC’s decision to sell NFML’s Urea at PkR1310/bag and resumption of Pak Arab’s operations in Jul’16 (cannibalization). FATIMA is currently trading at CY16/17F P/E of 9.9x/8.4x with D/Y of 3.8%.

• We maintain our EPS estimates for CY16/17F post 2QCY16 results (EPS of PkR3.36/3.96). We have lowered our Urea off-take assumption to 332k (from 362k tons earlier), to incorporate weak 2QCY16 offtake and concerns of availability of NFML’s (imported) Urea at cheaper rates. The effect is moderated by above-expected 2Q PAT (on non-core income).

• FATIMA announced 2Q unconsolidated EPS at PkR0.88, down 58%YoY, due to (i) decline in Urea/CAN off-takes, (ii) decline in retention prices of Urea/CAN, and (iii) increase in fuel gas rates to PkR750/mmbtu. Earnings would have been further depressed had it not been for an effective tax rate of 4.5% for the quarter. FATIMA also announced an interim cash dividend of PkR1.25/sh.