Dear Clients,

Engro Fertilizers Limited (EFERT) held its analyst briefing to discuss financial performance of 1QCY21 and company outlook going forward.

Key Highlights

– EFERT recorded the highest 1Q profit in the last 5 years as a result of gross margin expansion attributed to higher margin on DAP.

– Urea production remained low in 1QCY21 clocking in at 523k tons as opposed to 572k tons in corresponding period last year as a result of plant turnaround.

– For urea segment, EFERT’s sales grew by 3.4x because of low base effect and the retention price clocked in at PkR 1,644/bag.

– Current dealer transfer price for DAP hovers around PKR5,400/bag, that has risen in line with rise in international DAP prices.

– The company has been able to bring its dealers in the tax bracket in relation to the sales tax disallowance measure. So far, 59% of the dealers have been registered.

– With regards to expiration of concessionary gas, the management highlighted that there is lack of clarity and the matter will be settled by Jun2020. As per the management, negative outcome may reduce EFERT’s profitability by PkR 3.5bn (EPS: PkR 2.6).

– The company is undergoing BMR on base plant to improve its efficiency which would be completed next year.

– The management expects robust agronomic demand in CY21 on the back of i) implementation of Agri support package (PkR50bn) announced by the govt, ii) improved crop support price and iii) materialization of DAP subsidy worth PkR5.4bn.

– We have an ‘Outperform’ recommendation on EFERT with our price target at PKR 73/sh, an upside of 12% from current levels. The stock offers an attractive dividend yield of 15. The stock is currently trading at a forward PER of 5.4x.

KASB Research