FFBL rides on DAP

Pakistans sole DAP producer, FFBL, does not seem affected by the slowdown in DAP demand witnessed in the half year ending June. The company more-than-doubled its earnings in the first half CY11 and recorded the highest ever quarterly profits in the latter half of the period, thanks to a sharp increase in DAP price as well as in sales.
DAP constituted roughly 80 percent of the revenue mix and despite the overall decline in DAP demand by five percent during 1HCY11, the companys DAP sales registered a 29 percent year-on-year growth as the toll of the dip in demand was primarily borne by DAP importers.
The topline also got a boost from the price surge in both urea and DAP fertilizers. Gas curtailment during the period resulted in a massive hike of 46 percent year-on-year in urea prices, whereas DAP prices followed the trend in the international market, rising by a whopping 44 percent.
Despite a 15 percent increase in cost of raw material (Phosacid) during 2QCY11 over the previous quarter, gross margins improved to 42 percent, beating consensus estimates. It is believed, the high inventory levels during the period helped improve the margins as rising DAP prices more than offset the increase in Phosacid cost while cheap inventory cost augmented primary margins.
The company has historically been rich in cash and the latest numbers reveal cash and bank balances above Rs10 billion, making room for improved other income. FFBL is gradually moving back to its high-dividend payout policy, evident by an interim dividend announcement of Rs2.25/share - taking the year-to-date payout to an impressive Rs3.5/share.
While there are concerns over DAP demand for the remaining half of CY11, the revenues can be expected to soften a bit as the only cushion might come from high DAP prices. The primary DAP margin are likely to come slightly below the current level of $300/ton, but the company sits on a comfortable DAP inventory of 100,000 tons, which should provide a breather to its gross margins in times of low demand.
The companys stock price has appreciated by 33 percent since the start of CY11, and based on the earnings multiples, the stock seems relatively cheap. Yet, analysts seem to be on the cautious side as concerns loom over DAP demand in the near term.

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FFBL P&L

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(Rs mn)               1HCY11   1HCY10     chg    2QCY11   2QCY10    chg

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Sales                18,017   11,919      51%    9,963    5,353     86%

Cost of sales        11,088    8,083      37%    5,781    3,326     74%

Gross profit          6,929    3,837      81%    4,182    2,027    106%

Gross margins            38%      32%     19%       42%      38%    11%

Finance cost            373      332      13%      266      233     14%

Other income            677      464      46%      348      237     47%

Profit/(Loss) on JV      64       30     116%       61      122    -50%

PAT                   3,514    1,722     104%    1,956      913    114%

EPS (Rs)               3.76     1.84              2.09     0.98

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Source: KSE notice