The blue chips result season kicked off yesterday with Fauji Fertilizer Bin Qasim surprising the market, as its half yearly profits more than tripled contrary to consensus estimates. The 25 percent above estimates profit made investors in the market going for FFBLs shares as there was no stock traded more than FFBLs on Tuesday, with its share price going up by nearly 3 percent.
The massive year-on-year increase in DAP prices is well reflected in the top line performance - the sweet-sour effect of the 20 percent DAP price surge resulted in reduction in DAP volumetric sales by 38 percent (5MCY10), but the same also halted what could have been a bigger fall in revenues.
The companys massive gross margin improvement tells an interesting story. The gas curtailment for fertilizer did not affect the companys urea production a great deal as it declined by 7 percent in the 5MCY10. Urea price, in the meanwhile, were raised by Rs 80/bag, which more than made up for the production losses resulting in healthier product margins.
The slowdown in DAP off-take also meant higher inventories that the company carried over to the 2HCY10. The breakdown of cost shows closing stock worth more than Rs 5 billion by June 2010, which can dent the gross margins going forward, should the DAP sales remain lacklustre.
The major surprise, however, was provided by the profits from joint ventures, which in the recent past have caused to the thinning of the bottom line. Just when no one was expecting the companys subsidiary in Morocco, the PMP to make profits - it did, announcing the end to a seemingly never endings wait.
Expect the share price to gain a few points in the near future, but concerns remain to impact the companys performance once the dust settles. In the absence of a government subsidy on DAP, the future of Phosphate fertilizer application by the farmers in the fast approaching season seems cloudy.
Feedstock gas might well be restored, but urea does not make a big portion of the companys profits anyways. The joint venture income which is in green this time, could well turn all red the next time, as some fear that the income has been booked on the back of estimates, which could well face a reversal. So, enjoy the rally - but beware - it may be painfully shortlived.
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FFBL P&L
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Rs mn 1HCY10 1HCY09 % chg 2QCY10 2QCY09 % chg
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Sales 11,919 14,998 -21% 5,353 9,142 -41%
Cost of sales 8,083 12,049 -33% 3,326 7,012 -53%
Gross profit 3,837 2,949 30% 2,027 2,130 -5%
Gross margins 32% 20% 64% 38% 23% 63%
Finance cost 332 998 -67% 233 370 -37%
Other income 464 412 12% 237 165 44%
Profit/(Loss) on JV 30 (316) N/A 122 (315) N/A
PAT 1,722 498 246% 913 485 88%
EPS (Rs) 1.84 0.53 0.98 0.52
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Source: KSE announcement
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