Update Pulse

April 28, 2011

Fertilizer Sector: Preview

FFC

Result

Pakistan Research

Synopsis
Fauji Fertilizer Company Limited (FFC) is scheduled to announce its 1QCY11 financial results tomorrow. As per our expectations, the company is likely to post Profit After Tax (PAT) of PKR4.02bn translating into an EPS of PKR4.75, posting a substantial rise of 48% YoY as against the corresponding period of last year when company had recorded PAT of PKR2.79bn and EPS of PKR3.22 respectively. We also expect company to announce first interim cash dividend of PKR4.50/share. In this report we present our expectations on 1QCY11 results and future outlook.
(PKR m) Sales Cost of Sales Gross Profit Distribution cost Operating Profit Finance Cost Other operating Expenses Other Operating Income Profit Before Tax Taxation Profit After Tax EPS (PKR) Gross profit margin Operating profit margin Net profit margin 1QCY10 9,499 5,455 4,044 903 3,142 264 319 1,262 3,821 1,092 2,729 3.22 43% 33% 29% 1QCY11 11,688 6,078 5,610 994 4,617 348 351 1,836 5,754 1,726 4,028 4.75 48% 40% 34% % Chg 23% 11% 39% 10% 47% 32% 10% 45% 51% 58% 48%

the main reason behind the expected rise in monetary sales. We believe that the substantial Increase in sales is likely to take gross profit of the company to PKR5.61bn posting a rise of 39% YoY as against PKR4.04bn in same period of the last year.

HOLD
Market Snapshot KSE 30 KSE 100 KSE ALL Index 11605.61 11947.44 8320.55 Chg 5.73 13.98 12.09 % 0.05 0.12 0.15

Rise in other income may offset impact of higher distribution and finance costs...
We expect distribution cost to witness an increase of 10% YoY to PKR994m in 1QCY11 against PKR903m in the same period of the last year. This upsurge in distribution cost is likely to be driven by transportation cost. However, we expect operating profit to be recorded at PKR4.62bn with an increase of 47% over last year. We also expect other income to jack up the bottom line as it is expected to post a rise of 45% YoY to PKR1.83bn against 1QCY10 when its was recorded at PKR1.26bn. Foremost chunk of the other income is likely to come through dividend income from FFBL. We expect financial charges to post an increase of 32%YoY to PKR348m against PKR264m during the corresponding period of last year. Recommendation and outlook We believe that the demand of urea will grow sharply owing to upcoming Kharif sowing season. However, increased prices for urea because of gas curtailment and imposition of GST may test purchasing power of the end user. We believe that locally made fertilizers are sold at a substantial discount to the international prices. However, if government does not change its stance on gas curtailment, this will lead local producer to incur production losses and to avert production losses producers will have to raise prices even further. We believe, any further hike in urea prices will weaken the purchasing power of the farmers, thus, can put an adverse impact on agricultural production as a whole. Our DCF based target price for FFC is PKR148. The scrip is currently trading at a 5% discount to its fair value based on yesterdays closing. We recommend HOLD.

Key Data Market Cap(PKR bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m)

119 848 FFC.PA 1.29

155% 137% 119% 101% 83% 65%

12M FFC relative performance vs KSE

FFC KSE-100

Aug-10

Apr-10

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Feb-11

Source: Company Financials, Summit Capital Research

Top line to post a substantial rise of 23% YoY...

We expect top line to reach PKR11.69bn in 1QCY11 by posting a substantial rise of 23% YoY over last year when sales of the company were recorded at PKR9.50bn. We expect company to register 5% YoY lower offtake of urea, however, a sharp rise in average urea prices of about 40% is

Muhammad Sarfraz Abbasi Sarfraz.abbasi@summitcapital.com.pk 021-35376125 B-209, Park Towers, Clifton, Karachi

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

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