Acquisition improves earnings
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."