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Engro Fertilizer (EFERT): 2Q2018 EPS Rs2.44, up by 31% YoY; DPS Rs4/share (Above expectations)

• Engro Fertilizer posted earnings growth of 31% YoY to Rs2.4/share during 2Q2018, that lies above our expectations. Earnings were higher mainly on the back of lower than anticipated effective tax rate of 33%. This was also lower than historical trend, where 2Q2017 and 2Q2016 tax rate clocked in at 42% and 52% respectively. We await management’s clarity over this issue.
• In line with expectations, the company’s urea gross margins hammered by 10ppts QoQ to 35% due to 1) rupee devaluation (as company’s concessionary gas and PP12 gas is US$ denominated) and 2) closure of Enven for maintenance, that increased weighted average cost of gas, we believe.
• Company recorded 33% YoY growth in its sales revenue due to increase in urea and DAP price by 10% and 20% YoY respectively. While, selling and distribution cost went down by 14% YoY due to lower handling cost.
• Finance cost during the 2Q2018 went down by 42% YoY to Rs362mn as company retired its short term borrowings by utilizing surplus cash, arising out of accrual of GIDC.
• Other income down by 75% YoY to Rs509mn as company recorded subsidy on urea for half of the quarter (as prices of urea were increased on May 07, 2018). Further, absence of cash subsidy on DAP is also another reason behind lower other income.
• We flag, 1) PKR depreciation, 2) regulatory control on fertilizer industry, 3) poor crop season and 4) unfavorable decision related to GIDC as a key risks to our earnings/valuation forecast.