Ac­qui­si­tion im­proves earn­ings

The Pak Banker - - 4EDITORIAL - Di­lawar Hus­sain

THE fer­tiliser in­dus­try oc­cu­pies a prom­i­nent place in Pak­istan as agri­cul­ture has a 21pc share in GDP, with ma­jor crops ac­count­ing for 5.4pc of GDP. To­tal fer­tiliser pro­duc­tion in the coun­try dur­ing the first half of this cal­en­dar year (1HCY15) clocked at 3.5m tonnes, rep­re­sent­ing an im­prove­ment of 13pc from 3.2m tonnes in the cor­re­spond­ing half of last year, ac­cord­ing to data from the Na­tional Fer­tiliser De­vel­op­ment Cen­tre (NFDC).

Urea makes the big­gest con­tri­bu­tion to the pro­duc­tion. Among the ma­jor pro­duc­ers, Fauji Fer­tiliser had the largest mar­ket share of 46pc in 1HFY15, fol- lowed by En­gro Fer­tiliser with 33pc, and the rest was shared be­tween Fa­tima Fer­tiliser and two un­listed en­ti­ties, Agritech and Na­tional Fer­tiliser Mar­ket­ing Lim­ited. 'The huge in­crease in Efert's prof­itabil­ity dur­ing the pe­riod was mainly due to the ac­qui­si­tion of En­gro Ex­imp and the avail­abil­ity of gas at con­ces­sion­ary rate to the En­ven fer­tiliser plant af­ter March' Mean­while, the listed fer­tiliser com­pa­nies, which have a cu­mu­la­tive mar­ket cap­i­tal­i­sa­tion of Rs572bn, have out­per­formed the stock mar­ket.

En­gro Fer­tilis­ers Lim­ited (Efert) was de­merged into a sep­a­rate busi­ness en­tity by the par­ent En­gro Cor­po­ra­tion on Jan­uary 1, 2010. It had Rs112bn in as­sets by end-2014, while its paid-up cap­i­tal amounted to Rs13.2bn in Rs10 shares. En­gro Cor­po­ra­tion held around 86pc of the fer­tiliser com­pany's stock, while the free float stood at 15pc. The Efert stock was trad­ing at Rs96.80 last Wed­nes­day, valu­ing the com­pany at Rs140bn.

The com­pany re­leased its fi­nan­cial fig­ures for 1HCY15 last week, and these were in line with an­a­lysts' ex­pec­ta­tions. It posted a profit- af­ter-tax of Rs7.12bn, trans­lat­ing into earn­ings-per-share (eps) of Rs5.35 - a jump of 111pc over last year's com­pa­ra­ble earn­ings of Rs3.38bn and eps of Rs2.61. The com­pany an­nounced a div­i­dend of Rs1.5 per share.

Sev­eral pos­i­tive de­vel­op­ments have con­trib­uted to the com­pany's im­proved per­for­mance this year. Lo­cal urea prices re­mained sta­ble at Rs1,813 per bag, given sta­ble do­mes­tic gas prices.

At an an­a­lyst brief­ing on Au­gust 12, the man­age­ment con­firmed that the compa- ny had com­pleted the ac­qui­si­tion of 100pc shares of En­gro Ex­imp Pri­vate Lim­ited (a sis­ter trad­ing arm). Fol­low­ing this, the com­pany has started im­port­ing and mar­ket­ing phos­phate-based fer­tilis­ers, mainly di­ammo­nium phos­phate (DAP).

"The huge in­crease in prof­itabil­ity dur­ing the pe­riod was mainly due to the ac­qui­si­tion of En­gro Ex­imp and the avail­abil­ity of gas at con­ces­sion­ary rate to the En­ven fer­tiliser plant af­ter March," con­curred Global Se­cu­ri­ties fer­tiliser an­a­lyst Asad Raza Nayani. He cal­cu­lated that the ac­qui­si­tion had aug­mented Efert earn­ings for the six months by 38pc to Rs38bn.

Other than that, the fact that the En­ven plant con­tin­ued to re­ceive con­ces­sion­ary gas for the whole quar­ter was a big bless­ing. In or­der to pro­tect mar­gins from any un­fore­seen dis­rup­tion on gas front, Efert has planned to im­port and mar­ket other agri­cul­tural prod­ucts such as in­sec­ti­cides and pes­ti­cides. The com­pany is also ex­plor­ing the pos­si­bil­i­ties of en­ter­ing for­eign mar­kets like the US, Africa and the Mid­dle East.

How­ever, there are con­cerns that the re­cent floods would harm the crops, which would in turn dent fer­tiliser com­pa­nies' earn­ings in the near fu­ture. But Umair Naseer, an economist at Topline Se­cu­ri­ties, cau­tioned that it was too early to pre­dict the ex­act amount of dam­age by flood­ing this year. "How­ever, if it con­tin­ues to rain, other kharif crops, in­clud­ing rice, su­gar­cane and maize, may also suf­fer."

Nonethe­less, the fer­tiliser firms had seen strong off­take num­bers in 1HCY15 "due to the de­lay in the sow­ing of rabi crops and the im­proved avail­abil­ity [of wa­ter] through rains; urea off­take recorded a 12pc yearly im­prove­ment," said an an­a­lyst at In­ter­mar­ket Se­cu­ri­ties Lim­ited.

Mean­while, Tahir Ab­bas, an an­a­lyst at Arif Habib Lim­ited, men­tioned "un­avail­abil­ity of con­ces­sion­ary Guddu gas go­ing for­ward" as key risks for the com­pany's per­for­mance. Ah­san Ar­shad, an an­a­lyst at In­vestCap, summed up by say­ing that in the short run, the floods could have ad­verse reper­cus­sions on farm out­put, and the fer­tiliser in­dus­try's off­take could suf­fer as a re­sult. "On the other hand, the Iran nu­clear deal will re­store the Iran-Pak­istan gas pipeline agree­ment, which would help cater to the gas short­age in the fer­tiliser sec­tor. How­ever, an over­loaded gas dis­tri­bu­tion net­work would ham­per the abil­ity to prop­erly man­age and dis­trib­ute the ad­di­tional im­ported gas."

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