Dear Clients,

Fauji Fertilizer Bin Qasim Limited (FFBL) held its analyst briefing today to discuss financial performance of CY20 and company outlook going forward.

Key Highlights

– The company witnessed a turnaround in profitability in CY20 because of i) higher DAP volumes, ii) improved margins due to better retention price and iii) lower finance cost.

– The management expects 2021 to be a promising year for FFBL as margins are expected to stay healthy in 2021 and subsidiaries are performing well.

– To highlight, Fauji Foods Limited posted a 40% growth in 2HCY20 due to better management and restructuring of loans. As per the management, amount of milk collection tripled in 2HCY20, therefore dairy segment’s performance is likely to improve in 1HCY21 as well.

– To recall, the long term gas agreement with SSGC expired in Dec’2020, however the company went through long negotiation with the govt for the successful renewal of gas supply agreement between FFBL and SSGC.

– Under the income tax disallowance the company booked provisioning worth PkR780mn due to sales to unregistered dealers.

– As per the management, a GIDC reversal of PkR1.0bn is expected this year due to new accounting treatment.

– DAP prices are expected to remain elevated due to shortage in international market and lower opening inventory for 2021. Therefore, as per the management, the primary margins would be better than the last year.

– There has been no settlement of subsidy receivable and sales tax receivable by the government. However, the company is trying to settle it against GIDC payable.

– FFBL plans to finalize the sale of its 2 Wind Power Projects by the end of FY21.

– The company charges a premium of PkR100/bag to the privately imported DAP.

– The management is expecting a reduction in volumes during 2021 due to higher prices and delay in subsidy implementation.

– FFBL’s plant was shut for maintenance for 1.5 month this year and operations resumed on 15th Feb 2021.

– FFBL’s current DAP price (ex-Karachi) stands at PkR4,750/bag.

– Given rise in local DAP prices and delay in implementation of DAP subsidy, we might see decline in DAP volumes. We have a Neutral stance on the stock and our target price stands at PkR26/sh. The stock currently trades at one year forward PER of 10.67x and offers a dividend yield of 3.8%.

Regards,
KASB Research