Corporate results: Fauji Fertilizer stumbles after steep run

Company declares dividend amid drop in earnings and cash outflow.

Despite a decrease in profits, FFC has declared a hefty cash dividend of Rs3.75 per share for the quarter ended June 2013.

KARACHI:


Fauji Fertilizer Company (FFC) posted a profit of Rs9.5 billion for the half year period ended June 30 2013, down 8% from Rs10.3 billion for the corresponding period in the previous year.


Revenues from sales dropped from Rs36 billion to Rs34 billion for the period, putting the biggest dent in profits. Despite 17% MoM increase in urea off-take for the sector in June according to JS-Global, FFC’s off-take clocked at 209,000 tonnes for June, down 14% MoM, but this may be attributable to lower volumes available for sale. An increase in input costs and a drop in fertiliser prices brought profit margins down one percentage point to 47% for FFC.

Off-take for the half year period was up 5% YoY for the sector according to Shajar Capital, however YoY off-takes for June fell 45%.

The increase in MoM off-take is most likely fuelled by an expected rise in gas prices in the near future, which will translate into higher fertiliser prices as costs increase thus pushing buyers to stock up on cheap fertiliser before the price hike, further squeezing future profit margins.

“The major concern for the fertiliser sector has been the speculated gas price hike, which is yet to materialise due to the prime minister’s directive to wait till August (likely post Eid). From our vantage point, in the current international urea price and supply scenario, complete pass through of incremental gas cost by domestic producers appears to be a challenge” said Naveed Tehsin of JSGlobal.


FFC enjoyed a relatively constant gas supply compared to the rest of the sector. However in the future the government is expected to place an efficiency audit on all fertiliser firms to determine gas supply, which may lead to lowered supply.

“The looming threat of gas price rationalisation may cause the stock to underperform going forward, in our view,” said analysts at Shajar Research.

Despite a decrease in profits, FFC has declared a hefty cash dividend of Rs3.75 per share for the quarter ended June 2013, bringing the figure to Rs7.25per share for the half year period ended June 2013.

FFC, which holds interests in Askari Bank, will ascribe to a 55% rights share in the bank, that is it will avail the opportunity to buy 55% more shares in the company to consolidate Fauji Group’s controlling share. This will lead to a cash outflow of Rs1.9 billion since the group has decided to pay for the buyout through internally generated revenue completely.

The Fauji Group as a whole will see massive cash outflows in the future as it seeks to diversify its businesses. The buy-out of Askari Bank has cost the group Rs14.2 billion in cash.

FFC also witnessed a decrease in ‘other income’ which fell to Rs1.9 billion for the half year period ended June 2013 compared to Rs2.45 billion in the corresponding period previous year. The drop is attributed to lower dividend payouts by Fauji Fertilizer Bin Qasim Limited (FFBL). However FFBL posted a dividend payout of Rs1.75 per share last week, which are expected to bolster earnings for FFC in the next quarter.

Published in The Express Tribune, July 30th, 2013.

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