Fauji Fertilizer Bin Qasim said its net profit in 2003 totalled Rs 1,201 million (EPS: Rs 1.48), 44 percent lower than 2002.
The decline was on account of 86 percent lower tax asset booked to income statement and 30 percent lower compensation from the government, according to a report of Elixir Securities.
On pre-tax and pre-government compensation basis, the company reported 137 percent improvement in earnings.
Going forward, government compensation to the company is expected to continue till CY08. On 'stand alone' basis, the scrip is overpriced.
However, the scrip is moving on the news flow with regard to its possible merger with FFC that already holds 58.7 percent of FF Bin Qasim's shares.
Discussions with the management revealed that currently the two companies are working on the feasibility of the merger and no final decision has been taken yet.
During the year, FF Bin Qasim touched 560,000 tons in urea production, an all-time record for the company.
This record production was achieved despite gas shortages during the year. Record production is likely to have resulted in record sales of urea as well. The company's DAP plant started operations in September
2003 and produced 73,000 tons during the year. Record urea sales and resumption of DAP sales contributed to the 30 percent growth in FF Bin Qasim's top line. Gross profits were adversely affected by the resumption of the less profitable DAP plant and 2.5 percent increase in fuel prices.
"We would like to remind investors that annual feedstock price increase under the fertiliser policy does not impact FF Bin Qasim."
CY02 profits were inflated on account of booking of deferred tax asset and Rs 1 billion in government compensation for non-implementation of fertilizer policy. CY03 results booked lower tax assets and Rs 700 million in government compensation.
"We believe that the reason for booking tax asset this year in view that it will soon resume DAP plant, the company can take the benefit of its tax losses to a greater extent. As for the lower government compensation, it is part of a schedule till CY08 whereby the company would receive Rs 700 million annually till CY06 and would receive Rs 600 million for CY07 and CY08."
Discussions with the management revealed that the feasibility study on the merger with FFC is still continuing and no decision has been taken yet.
Market rumours are hinting at two possible share swap ratios of 1:5 (FFC: FF Bin Qasim) and 1:4.
The latter ratio would be more in favour of FF Bin Qasim's shareholders. "Consequently, we expect some resistance from FFC's shareholders."