FFBL rides on higher margins

Higher fertilizer prices and the release of phosphate related pending subsidy by the government enabled Fauji Fertilizer Bin Qasim to report a manifold increase in first quarter profits.
Despite nearly a month of plant shut down and higher-than-expected losses from its associated business, the company earned Rs809 million (EPS: Rs0.87) during the quarter ending March as against virtually nothing in the same period last year.
After touching a low of $415/ton in December, the price of phos-acid in international market marched northwards to about $610/ton in March. That helped FFBL to increase DAP prices in local market by 20 percent during the first quarter, while benefiting from higher urea prices at the same time. The price of domestic urea rose by 7-9 percent during the first quarter to hover around Rs790-810/bag.
FFBL, the only company to manufacture both types of prime fertilizers, registered a 12 percent year-on-year growth in its turnover.
Better pricing amid sticky phosphate cost helped the company improve its phosphate primary margins by 60-70 percent on yearly basis, helping overall gross margins to almost double during the period.
Unlike the companies in energy sector, FFBL was lucky enough to get its due share of pending government receivables last year, when the government released as much as Rs12.4 billion to the company.
The carry over affect of that reimbursement provided FFBLs treasury desk enough room to offload a huge pile of short-term borrowing, which was reduced by more than Rs6 billion (59%) in a years time. Consequently, its financial charges reduced to a sixth of its year-ago levels for the quarter in question.
The firms treasury team seems to have no more interest in arbitrage earning from low cost short-term borrowing to invest in money market funds and other short term instruments.
FFBLs short-term loans reduced by Rs3.6 billion in the last three months, but the flipside is visible in an almost equivalent cut down in its short-term investments. Nonetheless, FFBLs long-term investment in the demand-hedged power sector is going to reap sweet fruits going forward.
The company has been de-leveraging its books, and therefore benefiting from lower finance costs. However, the benefits were reduced partially by losses stemming from FFBLs Joint Venture Pakistan Maroc Phosphore (PMP).
On one end, FFBLs DAP business gained from regulated phos-acid prices, which resulted in higher margins, but at the wrong end of the picture, its associated firm PMP, a phos-acid supplier, took a hit from it.
Put simply, the company paid the price of hedging, which reduces volatility at the expense of abnormal profits during favourable days. Going forward, the price disequilibria amongst phos-acid and DAP is likely to reduce, which might turn PMPs contribution green, but at the same time lower primary DAP margins.
With the management concentrating on reducing FFBLs leverage, the company announced a low dividend Rs0.5 per share. The equity erosion of Rs1.3 billion (12%) in the first quarter, on account of over Rs2 billion paid as last years final dividend, warrants caution on its payout this year.