Karachi: Improved gas flows to Sui based fertilizer plants resulted in higher urea production in the month of Aug’11 where total industry production stood at 484k tons (+10%MoM).
According to AKD Securities, Subsequently urea sales were also grew by 15%MoM to 556k tons. However, CY11TD offtake of urea was still down by 4%YoY to 3,717k tons largely due to product shortage (gas curtailment). On the other hand, DAP demand has benefited from the short supply of urea where CY11TD sales are up by 24%YoY to 524k tons, where the rise comes despite DAP being on an average 50% costlier than last year. For Aug’11, industry offtake was recorded at 77k tons, which is a fall of 42%MoM but still up by 53%YoY.
Retail level urea prices peak in Aug’11: While on the one hand urea shortage was a bane for farmers, fertilizer dealers seem to have made a killing on urea with retail urea prices spiking by 12%MoM to PkR1,691/bag, which implies a hefty spread of PkR311/bag over the company price. In the same vein, CAN prices also increased by 14%MoM to PkR1 381/bag as CAN is considered as a substitute for urea. Retail urea prices in Sep’11 have come down from their record highs following improved product availability coupled with lower demand from Sindh (floods).
ENGRO urea was the stand out performer in Aug’11: With the ENVEN plant up and running, ENGRO urea sales were up by 31%MoM to 150k tons. Urea sales for FFC and FFBL were relatively flat on a MoM basis. FFBL DAP sales were down by 48%MoM but were still up by 31%YoY. ENGRO was very active on the import front in Aug’11, where the company imported 55k tons of DAP to bring its ending DAP inventory to 163k tons. Product sales for FATIMA were relatively weak when compared to last month with both urea and NP sales showing a decline of 8%MoM respectively, while CAN sales were up slightly by 4%MoM, as overall FATIMA production declined by 18%MoM to 69k tons.
3QCY11 shaping to be another bumper quarter for fertilizers: Record high margins coupled with higher sales, particularly of DAP are likely to drive fertilizer earnings in 3QCY11 as well. ENGRO’s fertilizer earnings are expected to grow by 140%QoQ following higher urea sales. Similarly FFBL and FFC earnings are also forecast to grow by 49%QoQ and 26%QoQ, respectively with FFBL earnings driven by robust DAP sales while higher dividend income from FFBL would boost FFC earnings.
While floods would have a partial impact on Sep’11 offtake, sales are likely to rebound strongly in 4QCY11 as was witnessed last year where urea sales increased by 68%QoQ in 4QCY10, after sales were affected by floods in 3QCY10. Additionally, floods this time are just limited to Sindh, which accounts for – 20% of national urea offtake.
At current levels AKD Securities recommends a Buy on ENGRO and FFC with respective Target Prices of PkR183/share and PkR198/share, while AKD Securities’ has a Reduce stance on FFBL with a Target Price of PkR55/share.