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Pakistan Fertilizer: Profits likely to rise in 3Q2020; Market-Weight maintained

• We expect Topline Fertilizer Universe earnings to grow by 64% YoY (+39% QoQ) in 3Q2020 driven by improvement in earnings of Fauji Fertilizer Bin Qasim (FFBL). Excluding FFBL, earnings are likely to grow by 27% YoY and (+1% QoQ).
• We expect earnings to clock in 3% YoY lower during 9M2020.
• Urea sales are expected to increase by 2% YoY to 1.5mn tons (-7% QoQ), while DAP offtake is likely to grow by 45% YoY (+94% QoQ) to 752k tons during 3Q2020.
• DAP sales have seen a significant increase as dealers had held back their purchases in 2Q2020 on expected materialization of subsidy.
• Government had approved a package of Rs50bn for the agriculture sector on May 13, 2020, which included a subsidy of Rs37bn to farmers on fertilizers in the form of Rs925/bag on DAP. However, the same has not materialized as yet.
• Urea prices declined by 14% YoY during 3Q2020 as all companies passed on the benefit of reduction in Gas Infrastructure Development Cess (GIDC). The prices remained unchanged QoQ at Rs1,661/bag.
• DAP prices declined by 3% YoY, while were up by 4% QoQ to Rs3,516/bag - in line with increase in international DAP prices.
• FFC: We expect Fauji Fertilizer Company (FFC) to post unconsolidated EPS of Rs3.6 (+28% YoY) in 3Q2020. The increase in earnings is mainly owing to (1) increase in DAP offtake by 27% YoY, (2) improvement in Gross Margins by 5ppts and (3) decline in Finance Cost due to lower interest rates. Earnings are likely to decline by 6% QoQ amid decline in Urea offtake by 18% QoQ and lower Other Income given absence of dividend income from Askari Bank. Along with the result, we expect company to announce interim cash dividend of Rs2.75/share.
• EFERT: We expect Engro Fertilizer (EFERT) EPS to rise by 26% YoY to Rs3.1 during 3Q2020 mainly due to (1) increase in Urea and DAP offtake by 35% YoY and 90% YoY respectively, (2) 45% YoY decline in Finance Cost and (3) lower effective tax rate of 29% vs. 44% in 3Q2019. Earnings are expected to increase by 8% QoQ due to increase in DAP offtake 130% QoQ while Urea offtake declined by 12% QoQ. Along with the result, we expect the company to announce interim cash dividend of Rs3.0/share.

FFBL: We expect Fauji Fertilizer Bin Qasim (FFBL) to post unconsolidated EPS of Rs1.9 in 3Q2020 compared to LPS of Rs0.5 in 3Q2019. The turnaround is expected due to (1) increase in Urea and DAP offtake by 15% YoY and 24% YoY respectively, (2) improvement in Gross Margins amidst increase in DAP prices and reduction in GIDC as the company did not pass on the full impact on DAP and (3) decline in Finance Cost. On a QoQ basis, profitability is expected to improve due to (1) increase in DAP offtake by 118% QoQ, (2) improvement in Gross Margins, (3) lower Finance Cost and (4) absence of impairment loss of Rs1.2bn on Fauji Meat limited