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Pakistan Fertilizer: Fertilizers to depict sequential improvement in 2Q2020; Market-Weight stance maintained

• We expect Topline Fertilizer Universe earnings in 2Q2020 to grow by 1% YoY, while the same is likely to be higher by 3.7x QoQ. In 1H2020, we expect our Fertilizer Universe earnings to be 28% YoY lower.
• In 2Q2020, fertilizer sector has witnessed a mixed trend where Urea sales are expected to increase by 5% YoY to 1.6mn tons, while DAP sales are likely to decline by 27% YoY.
• Sequentially, Urea offtake is expected to increase by 56% QoQ and DAP sales are likely to increase by 58% QoQ as in 1Q2020 dealers and farmers held back their purchases on anticipation of decline in price.
• In 2Q2020, average Urea prices declined by 10% YoY and QoQ to Rs1,657/bag as all companies passed on the benefit of Gas Infrastructure Development Cess (GIDC) elimination.
• DAP prices declined by 5% YoY and 3% QoQ to Rs3,393/bag.
• We are Market-Weight on Pak Fertilizers, where Fauji Fertilizer (FFC) remains our preferred play. Key triggers for the sector include (1) favorable decision by the courts on GIDC, (2) timely materialization of the subsidy announced by the government and (3) improving farmer economics. 
• FFC: Fauji Fertilizer Company (FFC) is expected to announce 2Q2020 earnings on Jul 27, 2020. We expect FFC to post unconsolidated EPS of Rs3.6, down 12% YoY in 2Q2020. The decline in earnings during 2Q2020 is mainly owing to 11% YoY fall in revenues amidst 57% YoY lower DAP offtake and decline in Other Income due to lower interest rates. Sequentially, earnings are likely to increase by 7% QoQ amid rise in offtake of Urea and DAP by 16% and 75%, respectively. This again is down to lower Other Income given lower interest rates and absence of dividend income from Askari Bank. Along with the result, we expect company to announce interim cash dividend of Rs2.7/share.
• EFERT: Engro Fertilizer (EFERT) is expected to announce 2Q2020 earnings on Jul 29, 2020. We expect company’s EPS to rise by 31% YoY to Rs3.1 during the quarter mainly due to (1) increase in Urea offtake by 47% YoY, (2) 47% YoY decline in finance cost and (3) lower effective tax rate of 29% vs. 48% in 2Q2019. Sequentially, earnings are expected to increase by 630% QoQ due to increase in Urea and DAP offtake by 291% QoQ and 174% QoQ, respectively. Along with the result, we expect the company to announce interim cash dividend of Rs3.0/share.

FFBL: Fauji Fertilizer Bin Qasim (FFBL) is expected to announce its 2Q2020 result on Jul 24, 2020. We expect the company to post unconsolidated LPS of Rs0.3 in 2Q2020 compared to LPS of 0.1 in 2Q2019 and Rs3.26 in 1Q2020. The sequential turnaround is expected due to (1) improvement in Gross Margins amidst reduction in GIDC as the company has not passed on the full impact on DAP, (2) decline in international coal prices resulting in lower fuel cost and (3) decline in finance costs. Improvement in earnings is further accentuated given increase in revenues by 61% QoQ amidst higher Urea and DAP offtake by 149% QoQ and 32% QoQ, respectively.