Fauji Fertilizer Company Limited (FFC) announces Q3 financial results

Akseer Research has just released an update on FFC’s recent quarterly results. Here are the important points from the FFC earnings announcement:

Strong Growth in Net Sales and Profit

FFC, a leading fertilizer company, reported robust performance in the first quarter of CY24. The company’s unconsolidated EPS increased by 24% year-over-year (YoY) to PKR 8.27. Alongside this, FFC declared an interim cash dividend of PKR 5.50 per share for the quarter.

Net sales surged by an impressive 60% YoY, reaching PKR 58.4 billion. This significant increase was driven by better urea prices (up 41% YoY) and higher volumetric sales. Notably, urea sales rose by 5% YoY, with the company also handling 94,000 tons of imported urea during the quarter.

Margin Pressure Due to Cost Factors

Despite the strong revenue growth, gross margins declined to 29.6% in 1QCY24, down by 2.0 percentage points from the previous year. This reduction was attributed to the contribution of lower-margin imported urea sales and higher gas prices, despite a notable increase in fertilizer prices.

Distribution costs rose sharply by 70% YoY to PKR 5.2 billion during the quarter. This increase was mainly due to higher transportation expenses, driven by the implementation of axle weight regulations and rising fuel charges.

Other Income Boosts Bottom Line

FFC saw a substantial increase in other income, reaching PKR 10.2 billion, up by 2.9 times YoY. This growth was attributed to better returns on investment portfolios and higher dividend income from power ventures, including the commencement of dividends from AKBL and FFBL.

Financial Costs and Tax Impact

Finance costs grew modestly by 3% YoY to PKR 1.5 billion in 1QCY24, reflecting increased borrowing and higher interest rates. The effective tax rate increased to 42% compared to 34% in the previous year’s first quarter, primarily due to higher super tax charges.

Analyst Recommendation

Despite the margin pressures and rising costs, Akseer Research maintains a ‘BUY’ recommendation on FFC. The report sets a December 2024 price target (PT) of PKR 162 per share, offering an upside potential of 14% along with a dividend yield of 17%.

Financial Performance Overview

The summary of FFC’s financial performance for the first quarter of CY24 compared to the same period last year:

Financial Highlights (PKR mn)	1QCY23	1QCY24	YoY Change
Net Sales	36,406	58,407	+60%
Gross Profit	14,575	17,287	+19%
Distribution Cost	3,056	5,193	+70%
Other Income	3,545	10,276	+190%
Finance Cost	1,464	1,505	+3%
Profit Before Taxation	11,943	18,027	+51%
Taxation	4,213	7,505	+78%
Net Income	7,730	10,522	+36%
EPS	6.08	8.27	+36%
DPS	4.26	5.50	+29%

Key Financial Ratios

Key Financial Ratios	CY21A	CY22A	CY23A	CY24E	CY25F	CY26F
EPS	17.2	15.8	23.3	31.2	30.1	32.7
EPS Growth	5.2%	-8.4%	48.0%	33.9%	-3.8%	8.7%
DPS	14.5	12.1	15.5	23.5	22.5	26.3
PER	8.4	9.2	6.2	4.6	4.7	4.4
Dividend Yield	10.0%	8.4%	10.7%	16.5%	15.8%	18.4%
EV/EBITDA	4.5	5.0	2.6	2.3	2.4	2.3
P/B	3.9	3.6	3.0	2.6	2.3	2.0
ROE	46.1%	39.4%	48.8%	56.1%	47.5%	46.9%

Valuation Basis

Our price target (PT) for Fauji Fertilizer Company Limited (FFC) is based on the Sum of the Parts (SOTP) method, where the Free Cash Flow to Equity (FCFE) is used to value the core fertilizer business. To calculate the cost of equity, we used a risk-free rate of 15%, a beta of 1.0, and a market risk premium of 6%, resulting in a cost of equity of 21%.

Investment Thesis

We maintain a ‘BUY’ recommendation on FFC with a PT of PKR 162 per share, offering an upside potential of 14% along with a dividend yield of 17%. Our positive outlook is driven by:

1. Higher fertilizer prices
2. Sustainable volume growth

Risks

Despite our bullish stance, it’s important to consider potential risks:

1. Gas supply curtailment
2. Lower-than-estimated fertilizer demand
3. Decrease in fertilizer prices below expectations

Company Description

Fauji Fertilizer Company Limited (FFC) engages in manufacturing, purchasing, and marketing fertilizers and chemicals. Additionally, the company invests in other sectors including energy generation, food processing, and banking operations.

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Income Statement (PKR million)

Income Statement (PKR million)	CY21A	CY22A	CY23A	CY24E	CY25F	CY26F
Net Sales	108,651	109,364	159,472	236,252	251,464	260,703
Cost of Sales	69,772	69,317	95,220	162,772	177,891	183,705
Gross Profit	38,879	40,046	64,252	73,480	73,573	76,997
SG & A	8,409	10,108	12,684	16,345	15,337	16,123
Operating Profit	30,470	29,939	51,568	57,135	58,235	60,874
Other Income	7,919	14,442	17,097	21,079	14,586	16,686
Other Charges	2,946	3,037	5,434	5,570	5,391	5,826
Finance Cost	2,292	4,868	5,624	6,590	4,746	3,622
Unwinding of GIDC Liability	2,441	2,119	1,160	755	0	0
Profit before Tax	30,339	33,687	53,547	65,300	62,685	68,112
Taxation	8,443	13,637	23,874	25,562	24,447	26,564
Profit after Tax	21,896	20,050	29,673	39,738	38,238	41,548

Balance Sheet (PKR million)

Balance Sheet (PKR million)	CY21A	CY22A	CY23A	CY24E	CY25F	CY26F
PPE	23,987	27,631	36,139	45,847	57,300	56,123
Other LT Assets	50,750	56,666	55,477	55,482	54,936	54,847
Non-Current Assets	74,737	84,297	91,617	101,329	112,237	110,970
Current Assets	126,270	155,825	109,502	132,203	117,348	108,519
Total Assets	201,007	240,122	201,118	233,532	229,585	219,489
Non-Current Liabilities	41,323	27,525	12,746	4,096	4,548	5,034
Current Liabilities	112,169	161,762	127,548	158,629	144,602	125,848
Total Liabilities	153,492	189,287	140,294	162,725	149,150	130,882
Equity	47,514	50,835	60,824	70,807	80,435	88,606
Total Equity & Liabilities	201,007	240,122	201,118	233,532	229,585	219,489

These tables summarize the financial performance and position of the company across various years, as well as the projected figures for future years.

Cashflow Statement (PKR million)

Cashflow Statement (PKR million)	CY21A	CY22A	CY23A	CY24E	CY25F	CY26F
Net Income	21,896	20,050	29,673	39,738	38,238	41,548
Non-cash Charges	2,435	2,415	2,914	3,228	4,965	5,594
Operating Cash Flows	37,332	25,994	54,043	44,957	32,871	38,372
FCFF	10,667	13,352	86,352	54,135	32,587	45,157
Net Borrowings	7,941	6,605	-62,632	12,361	-1,859	-8,022
FCFE	16,954	17,059	20,604	62,486	27,832	34,926
Net Change in Cash	1,153	1,190	1,520	2,440	35,170	34,392
Closing Cash	1,190	1,520	2,440	35,170	34,392	35,941

Disclaimer

The information in this article is based on research by Akseer Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.