Inter
Market Perspective
16 September 2015
Pakistan Fertilizers
Abdul Samad Khanani Investment Analyst abdul.samad@imsecurities.com.pk Better late than never!
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We initiate coverage on Pakistan Fertilizers with a Market weight stance where our coverage cluster offers upside of 27.6% (incl. D/Y: 8.6%) over a 12m horizon. Each of EFERT, FATIMA and the Fauji’s (FFBL; FFC) has something to offer; risk‐averse investors will find attraction in FFC/FATIMA while more adventurous souls will eye swift growth prospects in EFERT/FFBL. Core business dynamics remain subdued for FFC and FFBL which are focusing on diversification (Food, Energy); this could mean an expansion in valuation multiples as defensive business models evolve. On the flipside, EFERT and FATIMA are relatively better placed due to concessionary gas pricing (US$0.70/mmbtu). GoP farmer package, which calls for cut in urea price in aftermath of recent price increase by PkR159/bag, has introduced an element of uncertainty but we believe any price reduction is likely to be nominal. Having gained 20.5%CYTD vs. a 3.3%CYTD return for the Index, the Fertilizer sector has clearly turned the corner. We believe strong price performance can continue, although reasons will differ for each company. Core business a mixed bag The Pakistan Fertilizer space has seen fluctuating fortunes on gas shortage and competition from imported urea. With limited pricing power (9% discount to int’l urea) amidst upward pressure on gas pricing, the medium‐term core outlook is unexciting particularly for the Fauji’s. While tariff increases are a fillip for EFERT and FATIMA given their locked‐in concessionary gas pricing, outlook on gas supply sustainability is hazy. We flag that any reversal in the recent PkR159/bag hike in urea prices is a risk, but believe any reduction is likely to be minimal (PkR25‐PkR30/bag). IMS Fertilizer Universe TP Upside P/E (x) D/Y PkR (%) FFC 144.3 9% 8.53 9.07 10.8% CY15F CY16F CY16F FFBL 74.2 22% 16.23 16.78 5.3% EFERT 110.0 20% 7.25 8.79 8.7% FATIMA 62.4 33% 7.60 6.97 6.9% Source: IMS Research EPS (PkR) FFC FFBL EFERT FATIMA CY15F 15.48 3.76 12.69 6.18 IMS Estimates CY16F CY17F 14.57 15.36 3.64 6.40 10.46 11.51 6.74 7.06 Source: IMS Research Shift towards conglomeration… What ticks your boxes? I. FFC (TP: PkR144.3/sh): Add on high D/Y (CY16F: 10.8%) which stands out in soft interest rate environment. II. FFBL (TP: PkR74.2/sh): CY16F P/E of 16.8x justified by projected 3yr NPAT CAGR of 26%, driven by exposure to Banks, Food and Power. III. EFERT (TP: PkT110.0/sh): If Guddu gas lasts for a further 3yrs, CY14‐CY17F NPAT CAGR jumps to 33% and bull‐case TP rises to PkR137.8/sh. IV. FATIMA (TP: PkR62.4/sh): Core fertilizer play with the most secure business model. 40%
20%
0%
KSE100 Index Source: IMS Research Fertilizer Sector
Sep‐15
Jul‐15
May‐15
Mar‐15
‐20%
Jan‐15
EFERT and FATIMA are leveraged to the core fertilizer theme on the back of their concessionary feedstock pricing (US$0.70/mmbtu). On the flipside, we believe near to medium‐term price performance for the Fauji’s is likely to be more a function of their diversification projects. Food exposure in particular has the potential to lift overall valuation multiples where the Food sector trades at an average P/E of 30x. 60%
Nov‐14
…can lead to valuation rerating! Fertilizer Sector vs. KSE100 Index Sep‐14
Constraints on the primary business have necessitated a move towards conglomeration with FFC and FFBL venturing into the energy and food segments. Thematically, there is much to like – Pakistan experiences a chronic energy shortage and has a market of 200mn people. Execution risk remains, particularly as high dividend payout policies (~90%) mean significant leverage may have to be taken on, but strong track records give us confidence. Perspective
Pakistan Fertilizers – Investment Thesis •
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•
We initiate coverage on Pakistan Fertilizers with a Market weight stance. Recent farmer relief package, which calls for cut in urea price in aftermath of recent price increase by PkR159/bag, has introduced an element of uncertainty but we believe concerns have been overplayed. Any urea price reduction is likely to be nominal (PkR25‐30/bag), in our view, and will not change the thematic case for the industry to sustain its current margins. The sector is evolving; issues of gas curtailment and pricing congestion remain but concessionary gas plays (EFERT & FATIMA) are relatively immune. At the same time, those exposed to core business risks (FFC & FFBL) are in the midst of aggressive diversification in Food, Power and Banking. If the need arises, reduced LNG prices also make it a viable option for running plants. The IMS Fertilizer Universe has gained 20.5%CYTD to trade at a CY16F P/E of 9.49x (vs. 8.7x for broader market) and offers a CY16F D/Y of 8.60% (vs. 5.7% for KSE‐100). Outperformance can continue where valuation multiples can rerate as conglomeration effect kicks in for the Fauji’s while EFERT & FATIMA can potentially witness swift growth. I. FFC (TP: PkR144.3/sh): Add on high D/Y (CY16F: 10.8%) which stands out in soft interest rate environment. Core business dynamics may remain subdued but dividends from AKBL, FFC Energy Ltd (anticipated) and coupon from PIBs shores up earnings and increases confidence on payout sustainability. II. FFBL (TP: PkR74.2/sh): CY16F P/E of 16.8x appears pricey at first glance but is justified by projected 4yr NPAT CAGR of 17%, driven by exposure to Banks, Food and Power. Beyond next 2‐3yrs, FFBL’s D/Y is also likely to rise to 8%+. III. EFERT (TP: PkR110.0/sh): Has come full circle from urea price setter to price follower, unlocking potential for free lunch whenever FFC increases prices. Gas supply sustainability is the big IF but assuming Guddu gas lasts for 3yrs, CY14‐CY17F NPAT CAGR jumps to 33% and bull‐case TP rises to PkR137.8/sh. IV. FATIMA (TP: PkR62.4/sh): Buy on defensive characteristics where FATIMA is a core fertilizer play with the most secure business model (limited gas curtailment + US$0.70/mmbtu feedstock pricing). Pakistan Fertilizer Valuation Summary
CY14 Gas Gas Allocated Available (mmcfd) (mmcfd) Gross Margins (%) Index weight (%age) TP D/Y (x) Market Cap (US$ mns) (PkR) (%) D/E P/E EV/EBITDA (x) (x) EFERT 203 196 37.3% 67% 8.79 4.85 1,173 1.67 110.02 8.7% FFC 245 249 34.2% 58% 9.07 6.95 1,610 4.87 144.30 10.8% FFBL 78 46 16.9% 101% 16.78 8.10 546 1.05 74.18 5.3% 34% 6.97 62.38 6.9% FATIMA 110 94 Source: MPCL, Company Accounts IMS Research 63.9% Urea Stock 5.08 DAP 982 1.36 NP CAN NPK Capacity Utilization Capacity Utilization Capacity Utilization Capacity Utilization Capacity Utilization (mn tpa) (%) (mn tpa) (%) (mn tpa) (%) (mn tpa) (%) (mn tpa) (%) EFERT 2.28 85% ‐ ‐ ‐ ‐ ‐ ‐ 0.10 125% FFC 2.04 117% ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ FFBL 0.51 42% 0.60 117% ‐ ‐ ‐ ‐ ‐ ‐ FATIMA 0.50 70% ‐ ‐ 0.36 96% 0.42 96% ‐ ‐ Source: Company Accounts, IMS Research Perspective
Core business a mixed bag The Pakistan Fertilizer space has seen fluctuating fortunes on gas shortage and competition from imported urea. With limited pricing power (7% discount to int’l urea) amidst increased gas pricing (62%/23% for old fertilizer plants on feed/fuel), the medium‐term core outlook on volumes and pricing power is unexciting particularly for the Fauji’s. While gas tariff increases are a fillip for EFERT and FATIMA given their locked‐in concessionary gas pricing, outlook on gas supply sustainability is hazy. Hit to farmer incomes in the commodity down cycle is a further risk which could keep core dynamics in check although we flag consistent fertilizer application during commodity cycles. Supply & Demand Fertilizer plays a major role in Pakistan’s economy (21% weight in GDP; is dominated by four players namely FFC, EFERT, FFBL and FATIMA, with products ranging from Urea, DAP, CAN, NP, NPK, SSP and SOP. FFBL is the only DAP manufacturer, catering to 50% of total demand, with the rest imported. Despite having 6.9mn tons of urea production capacity, due to gas supply constraints Pakistan was able to produce just 4.8mn tons in CY14 against annual demand of 5.6mn tons, with the balance met through imports. On the demand front, urea consumption started dropping since CY10, after peaking at 6.44mn tons in CY09 where overall fertilizer application has also come off from 8.61mn tons in CY09 to 8.16mn tons in CY14. We attribute this to tripling of prices over last 9yrs. With Rabi sowing season just round the corner, Urea/DAP offtake should pick up pace to clock in at 5.8/1.4mn tons for CY15F against 5.6/1.5mn tons in CY14. DAP offtake trend (‘000 tons)
Urea offtake trend (‘000 tons)
7,000
6,000
5,000
2,000
1,750
1,500
1,250
1,000
750
500
250
0
4,000
3,000
2,000
1,000
0
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14
Imports
Imports
Source: IMS Research
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14
Local
FFBL
Source: IMS Research
Increasing focus on high margin products Over the years, the production index has declined due to higher availability of low BTU gas (MARI fields), which has increased the concentration towards more margin oriented fertilizers like NP/CAN, having 8% share each of annual fertilizer production of 6.22mn tons in FY14, against 5%/6% share of total fertilizer production of 6.19mn tons in FY09. Production/mmcfd is down due to low Btu gas
Fertilizer Production contribution by product category 100%
90%
80%
70%
79%
80%
79%
60%
50%
FY09
FY10
Urea
Source: IMS Research
FY11
DAP
CAN
74%
72%
FY12 FY13
NP
NPK
Tons 100%
72%
FY14
11.5 80%
11.0 60%
10.5 40%
10.0 20%
9.5 0%
9.0 FY09
FY10
FY11
FY12
FY13
FY14
Mari as %age of Total Gas
Fertilizer production/mmcfd of gas ‐ (Rhs)
Source: IMS Research
3|P a g e
Perspective
Gas Curtailment – LNG a viable counter Pakistan in general and the Fertilizer space in particular has faced severe gas curtailment over the last several years. Dedicated networks of Sui’s (SSGC & SNGP), and MARI supply Current gas curtailment on SSGCL approximately 593 mmcfd of gas which allows production of 4.9mn tons of nitrogen network stands at 30% based fertilizers (Urea and CAN), and 1.1mn tons of phosphate based fertilizers (DAP and NP). While MARI supply has been consistent, severe gas curtailment for plants on SNGP (Engro, DH Fertilizers, Pak Arab Fertilizers and Agritech) and SSGC (FFBL) has contributed to the downcycle of the sector from CY09. Contribution by Gas Networks (mmcfd)
Share of gas allocated to fertilizer against total gas production…
3,478 3,501 3,529 3,399 700 3,474 3,344 400 551 603 626 580 300 515 593 FY09
FY10
FY11
FY12
600 500 200 100 FY13
FY14
‐
FY09
FY10
FY11
FY12
FY13
FY14
Gas supplied to Fertilizer Sector (mmcfd)
SNGPL
SSGCL
MARI
Total Gas Production (mmcfd)
Source: IMS Research
Source: IMS Research
With recent increase in gas prices by 62%/23% for old fertilizer plants on feed/fuel to PkR500/750 per mmbtu (inclusive of GIDC), and consequent increase in Urea prices by PKR159/bag, plants facing gas curtailment can consume LNG to manufacture fertilizer case in point. Pak Arab fertilizer is currently running on LNG (approximately at US$9.5‐
10/mmbtu) to manufacture both CAN/NP, making LNG as a viable possibility at current prices. We foresee gas curtailment to continue by Sui networks, whereas LNG consumption can be expected to increase because of lower LNG prices (down 44% YoY) to US$8.5/ton, and increased Urea prices by 9% (PkR159/bag) to PkR1,994/bag. Pricing congestion International & Local DAP price parity
Local urea prices follow a discount to international urea prices due to subsidies on local gas. That said, this discount has significantly contracted from 64% in Jan’13 to 9% at present where local urea prices have almost tripled over the last 9yrs, courtesy increasing gas prices (incl. GIDC) and imposition of sales tax on fertilizers. On the DAP front, local prices have fluctuated between premium/discount to international prices; price discount used to be as high as 26% in Mar’09 which is currently close to par with international DAP prices. That said, prices of phosphoric acid rose by 12.5%YoY against slump in international DAP prices by 4%, which led to primary DAP margins of ~US$206/ton in July’15 vs. US$235/ton in the same period last year. International to local urea price parity
3,500
20%
3,000
10%
2,500
75%
0%
2,000
50%
1,500
25%
1,000
0%
4,000
3,000
2,000
‐10%
1,000
‐20%
125%
30%
5,000
PkR159/bag increase in price by FFC
100%
Jan‐15
Apr‐15
Jul‐15
Oct‐15
Jan‐15
Apr‐15
Jul‐15
Oct‐15
Jan‐15
Apr‐15
Jul‐15
Oct‐15
Jan‐15
Apr‐15
Jul‐15
FFC increased its urea prices by PkR159/bag from Sep1’15 2015. Others also followed the suite by increasing prices. Due to government pressure, and low commodity prices, this might not be popular move; therefore we have incorporated PkR135/bag increase in urea prices in our valuations. Jan‐15
Apr‐15
Jul‐15
Oct‐15
Jan‐15
Apr‐15
Jul‐15
Oct‐15
Jan‐15
Apr‐15
Jul‐15
Oct‐15
Jan‐15
Apr‐15
Jul‐15
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 ‐
Premium/Discount (Rhs)
DAP Imported (PkR/bag)
Source: IMS Research
DAP (PkR/bag)
Premium/Discount (Rhs)
Urea Imported (PkR/bag)
Urea FFC (PkR/bag)
Source: IMS Research
4|P a g e
Perspective
Phosphate fertilizers in Pakistan (DAP and NP) are internationally linked; since int’l prices are extremely volatile given the nature of input cost (phosphoric acid), pricing tends to follow primary DAP margins (currently at US$204/ton) which are calculated on the basis of cost of input (phosphoric acid). We believe Primary DAP margins should hover between US$210‐220/ton for local manufacturers between CY15F‐CY16F. Any devaluation in US$/PkR parity should bode well for FFBL as primary DAP margins are gauged in US$ terms. In order to encourage more usage of phosphate to improve crop yields, subsidy is also being considered from GoP on DAP (PkR500/bag), which should lock‐in primary DAP margins on pricing front of DAP and tempt farmers to consume more of DAP. GoP support GoP announced PkR25bn subsidy for Urea imports in FY16 budget. In recent news, GoP in Kissan Convention announced incentive package for farmers in shape of subsidy on Phosphate and Potash fertilizers at PkR500/bag (DAP). GIDC rates on Feed and Fuel Gas
350 The sector has been supported by the Government of Pakistan throughout its history, starting from subsidized feed gas supply to new fertilizer plants from US$0.7/mmbtu, support through subsidy on imported urea, and regulated imports of urea through the Trading Corporation of Pakistan. Recently however, pressure has arisen from imposition of Gas Infrastructure Development Cess (GIDC), prioritizing other sectors (e.g. Power and CNG) for gas allocation, and recent increase in gas tariffs for feed/fuel (62% for old plants; +5% for new plants/23% for all plants on fuel). That said, it appears that the worst is over on the regulatory front, particularly if int’l oil prices remain subdued which makes FO import a more equitable solution for the GoP rather than urea import, which is +ve for local manufacturers. Estimated cost pushes through GIDC (PkR/ton) of Urea
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 ‐
300 250 200 150 100 50 ‐
CY12
Feed PkR/mmbtu
CY13
CY14
CY15
4,642 4,642 2,623 2,623 2,815 2,815 2,037 2,037 1,591 1,591 1,236 1,236 408 408 247 247 CY12
CY13
CY14
CY15
FFC
Fuel PkR/mmbtu
EFERT
FATIMA
FFBL
Source: IMS Research
Source: IMS Research
Bumper crops topped with inventories 150%
80%
60%
100%
40%
50%
20%
0%
Cotton Stock to Use (chg)
Cotton Price (chg)
Wheat Stock to use change
May‐15
Dec‐14
Jul‐14
Feb‐14
Sep‐13
Apr‐13
Nov‐12
Jun‐12
Jan‐12
Aug‐11
‐40%
Mar‐11
Dec‐09
Apr‐10
Aug‐10
Dec‐10
Apr‐11
Aug‐11
Dec‐11
Apr‐12
Aug‐12
Dec‐12
Apr‐13
Aug‐13
Dec‐13
Apr‐14
Aug‐14
Dec‐14
Apr‐15
Aug‐15
Dec‐09
‐50%
0%
‐20%
Oct‐10
200%
May‐10
Cotton prices change since CY09
Grain output globally has witnessed a paradigm shift with bumper crops raising the stock to use ratios of various commodities to very high levels. This was the result of policy changes by few major players in the world including China. With ending inventories of cotton, soya bean, wheat and sugar at their new highs in six years, prices of these commodities are down by 56%, 40%, 40% and 53% YoY respectively. Wheat price change since CY09
Wheat price change
Source: IMS Research
Source: IMS Research
5|P a g e
Perspective
China’s export tax policy China has been controlling its Urea and DAP exports artificially by introducing export tariffs which have now been levied at a constant of RMB 80/ton (US$12.8/ton) for peak and non‐peak seasons; against 15% of int’l urea price + RMB 40/ton (US$50.2/ton) for peak and RMB 40/ton (US$6.4/ton) for non‐peak seasons on Urea. Similarly, export tariff for DAP has also been fixed at RMB 100/ton (US$16/ton) for peak and non‐peak seasons against 15% of int’l price + RMB 50/ton (US$70/ton) for peak and RMB 50/ton (US$8/ton) and non‐peak seasons. This should stabilize the margin fluctuations for Chinese fertilizer manufacturers in different seasons and could be a trigger for more supply from China, especially of DAP. It should further increase China’s role in determining nitrogen/phosphate based fertilizer prices going forward. Decrease in anthracite coal (used as fertilizer feed stock) prices by 24%YoY to US$52.3/ton, is also encouraging additional production in China since 45% of the capacity uses coal as feed stock. International Coal prices are down by 38% since Jan 2014 to US$52.3/ton. Pressure on int’l fertilizer prices would further restrict pricing power of local fertilizer industry. Though urea is a regulated in terms of imports in Pakistan, DAP is exposed to greatest risk on the int’l pricing front. Price change of Urea, Coal and Natural gas since CY10
Coal inventory levels with China (‘000 tons)
Urea Source: IMS Research
Coal, South Afican
Natural gas, US
50
China coal inventory ('000)
Mar‐15
Oct‐13
Apr‐14
Sep‐14
Apr‐13
0
Nov‐11
May‐15
Jan‐15
Sep‐14
May‐14
Sep‐13
Jan‐13
May‐13
Sep‐12
Jan‐12
May‐12
Sep‐11
Jan‐11
May‐11
Sep‐10
Jan‐10
May‐10
‐80%
Jan‐14
May‐12
Oct‐12
‐40%
100
Nov‐10
0%
May‐11
40%
150
Dec‐09
May‐10
Jun‐09
80%
200
Dec‐08
120%
Tons
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Jan‐08
Jun‐08
PkR
Coal, South African (US$/ton) ‐ Rhs
Source: IMS Research
What about farmer incomes? Local farmers unfortunately have been the victims of increasing input costs and downturn in commodity prices. Cotton being the major cash crop (int’l cotton prices down by 7% YoY), derives US$13.5bn of exports (56% of total exports) is under threat due to uncompetitive pricing in int’l market. This would lead to local farmers switching to grow other commodities like wheat and sugarcane, which can offer better margins/hectare of land. Our analysis suggests that out of all major commodities, sugarcane provides highest margin/hectare (support price of PkR182/mnd in Sindh) after application of fertilizer input. Although, it would vary from land to land, and other inputs like seeds and water. We believe farmers would be more tempted towards sugarcane production in Kharif season if the land allows it to do so. Required bags/hectare Urea DAP SOP/K Yield/hectare (kgs) Support Price/avg Price (PkR/kg) Revenue/hectare (PkR) Fertilizer input cost/hectare (PkR) Subsidy announced (at PkR5000/acre) Amount left after Fertilizer input (PkR) Source: FAO, Economic Survey, IMS Research Wheat Cotton Sugarcane 3.96 3.57 2.30 2,770 33 90,025 28,981 4.87 2.61 2.31 689 58 39,962
27,204 12,350 25,108 7.78 4.18 4.23 54,900 Subsidy announced
4.6 249,795 45,220 61,044 204,575 6|P a g e
Perspective
Shift towards conglomeration… Evolution of Fertilizer Sector FFBL Investment in Fauji Meat Limited Investment in FFBL Power Company Investment in Fauji Foods Limited Acquired 51% of Noon Pak. Limited FFC Investment in Fauji Fresh and Freeze Commencement of FFC Energy Ltd Plans to invest in Africa Acquired Engro Eximp EFERT Plans to Invest in USA/Africa FATIMA Acquired DH Fertilizers Plans to Invest in Midwest Fertilizers Source: IMS Research Constraints on the primary business of non‐concessionary gas players have necessitated a move towards conglomeration with FFC and FFBL venturing into the energy and food segments. Thematically, there is much to like – Pakistan experiences a chronic energy shortage and has a market of 200mn people. However, execution risk remains particularly as high dividend payout policies (~90%) mean significant leverage will likely have to be taken on. ENGRO is a successful model to follow, but it too had its share of travails before this was so. Why Conglomeration? While the sector’s GMs have fluctuated between a high of 62% in CY11 from a low of 32% in CY06, the Pakistan fertilizer space is generally seen as defensive, notable for its high D/Y (particularly the Fauji’s). This has been a key selling point of the sector over the years but now the room for maneuverability has shrunk considerably – little price discount (9%) to int’l prices will make it increasingly difficult to pass‐through cost increases to farmers while gas supply constraints have yet to be completely put to rest. Within this backdrop, there is an ongoing shift towards conglomeration in the sector, particularly from FFC and FFBL that do not enjoy concessionary gas pricing, unlike EFERT and FATIMA. Steps have already been taken to enter into sectors identified with high potential including Financial Services, Food and Power which are expected to pay off in years to come. This is similar to ENGRO which has diversified from a pure fertilizer entity to having a strong share in dairy, and is quickly increasing exposure to diversified Energy projects. Food/Banks/Power Sector Dynamics DYNAMICS OF BANKING DYNAMIC OF FOOD Rising per capita income (US$1,600) High margins of +35% Annual meat exports of US$230mn Lucrative GCC market for Halal Meat exports 40mn bank accounts vs. 200mn population Lower spreads but interest rates to pick up next year Improved asset quality leading to provisioning reversals Loan growth expected to pick up; current loans/GDP is just 15% Significant room for capital gains Single digit inflation to keep costs in check Guaranteed ROE of minimum 17% DYNAMICS OF POWER Large market with 200mn population One of the highest US$ based ROE Risk Hedging against inflation and exchange rate Successful business models of IPPs as an example Double digit D/Ys of min 11% suiting business model of Faujis. Selling directly to K‐Electric would mean slow accretion of receivables Lower efficiency factor would allow more potential efficiency gains Source: IMS Research Capital mixes will evolve Sector average Long term debt to equity (x)
3.00
2.50
FFC and FFBL being old plants have run on a < 1x D/E from CY10 onwards, in contrast to EFERT which borrowed heavily to set up a new 1.3mn ton urea line in 2009, as well as to FATIMA. Since EFERT and FATIMA have deleveraged significantly over the last few years, the sector (esp. the Fauji’s) is likely to lever up again given several capital intensive projects in the pipeline including FFBL’s coal power company (US$270mn). Sector long term debt position due to new plants (PkR mns)
120,000
100,000
80,000
2.00
1.50
1.00
0.50
0.00
CY10
Source: IMS Research CY11
CY12
CY13
CY14
Average Long term D/E 60,000
40,000
20,000
0
CY15F
CY10
CY11
CY12
CY13
FATIMA EFERT FFBL FFC
CY14
CY15F
Source: IMS Research
7|P a g e
Perspective
Are the sector’s high D/Ys under threat? The Pakistan Market’s average D/Y at 5.7%, is nearly twice that of the regional average and the Pakistan Fertilizer space’s (weighted avg.) D/Y of 8.6% is immensely attractive particularly within the backdrop of low interest rates (12m T‐bill yld: 6.5%). In this regard, while ENGRO has depicted a turnaround of late and is likely to catch up in payout terms, it endured a tough period during CY12 when it levered up to expand, faced severe gas shortages and had restrictions on dividends placed following a debt restructuring. While the gas supply situation for the Fauji’s is different, execution risk of new ventures is certainly present. CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10
D/Y has historically been high...
10%
8%
6%
4%
2%
0%
Industry Avg
FFC
ENGRO
Source: IMS Research FFBL
…but this may change in near‐term 20%
15%
10%
5%
0%
CY11
CY12
Industry Avg
CY13
FATIMA
CY14
CY15F
FFBL
CY16F
FFC
CY17F
EFERT
Source: IMS Research
We believe the sector should evolve in terms of D/Y as well; while FFC is likely to maintain its high D/Y (CY16F: 11.5%), EFERT should also emerge with an attractive yield (CY16F: 8.9%). FATIMA should remain in the middle while D/Y of FFBL could remain range bound at ~5% between CY15F/CY16F, at least until FFBL Power Company starts commercial operations with D/Y to normalize to 8.7%‐9.0% in CY17F, and sustain thereafter. This will be achievable on the back of likely leveraging by the Fauji’s to fund their upcoming diversification projects. 8|P a g e
Perspective
(Conglomeration)…can lead to valuation rerating! EFERT and FATIMA are leveraged to the core fertilizer theme where their concessionary feedstock pricing (US$0.70/mmbtu) has contributed to their rally (+17.7%CYTD for EFERT/+31.2%CYTD for FATIMA). On the flipside, we believe near to medium‐term price performance for the Fauji’s is likely to be more a function of their diversification projects. Food exposure in particular has the potential to lift overall valuation multiples where the Food sector trades at an average P/E of 30x vs. 9.5x for the Fertilizer space. Historical multiples for core fertilizers Historically, the Fertilizer sector’s P/E multiple has maintained close traction to broader KSE‐100 valuations; 10yr avg. P/E for the space is 9.2x vs. 8.7x for the broader Index. As business models evolve footprints in high growth areas including Food, Power and even Financial services can potentially propel valuation multiples higher. Considering core fertilizer metrics appear in equilibrium, we believe the fertilzier sector’s share price performance going forward (particularly for ENGRO/FFBL/FFC) could start to behave in a cyclical manner, tracking the growth potential that diversification entails. How earnings mixes will change… Over the next 3yrs, we see pure fertilizer’s contribution to the overall earnings mix (ENGRO/FFBL/FFC) falling to below 70%. The balance will emanate from Food, Energy and Banks, among others. This shift will be most apparent for ENGRO, FFBL and FFC. KSE 100 vs. Fertilizer Sector P/E comparison 20 (x) 16 100%
80%
60%
12 0%
Jul‐12
Dec‐11
May‐11
Sep‐10
Feb‐10
Jun‐09
Nov‐08
Mar‐08
Aug‐07
Fertilizer Sector (PE (x)
92%
99%
90%
84%
79%
74%
67%
CY15 F
CY16F
CY17F
‐20%
CY11
Others
KSE100 Index PE (x)
Source: IMS Research
Sep‐15
‐
Jan‐15
20%
Jun‐14
4 Oct‐13
40%
Mar‐13
8 Jan‐07
NPAT Evolution (ENGRO + FFC + FFBL)
CY12
Cements
CY13
CY14
Banking
Power
Foods
Fertilizer
Source: IMS Research
Rerating in valuation multiples We believe a changing earnings landscape (mix change) will trigger valuation multiples rerating for the Pakistan Fertilizer space, especially for FFC and FFBL. While Banks and Power tend to trade at similar multiples to Fertilizer, the Food sector has consistently traded at a significant premium (30x P/E vs. broader market P/E of 8.7x). As Food’s contribution in the earnings pie increases, assigned multiples will likely expand. KSE 100 vs. Food Sector P/E comparison
(x)
60
45
30
(x)
12
10
8
15
0
CY11
Source: IMS Research
CY12
Food Sector
CY13
KSE 100 vs. Power Sector P/E comparison
CY14
CY15F
KSE100 Index
6
4
2
0
FY11
FY12
FY13
Power Sector
FY14
FY15
KSE100 Index
Source: IMS Research
9|P a g e
Perspective
Evolution: Defensive structure to growth entities We believe initiatives from FFBL and FFC towards the food sector have and will continue to augment multiples of the overall Fertilizer Sector. In this regard, recent rerating has occurred on the back of the outstanding book building response of Al Shaheer Corporation (subscription on P/E of 37x) and announcement of tax exemptions in the FY15‐16 budget for new Halal meat ventures. We believe further rerating could still be on the cards since, the market has not yet completely priced in the entire spectrum of growth prospects for FFBL and FFC, in our view. Justified P/Es by Sector (x) Food Meat 35 25 ENGRO Justified P/Es by Cos. for CY16F (x) 13.7 Consumer 15 FFBL 11.9 Fertz 9.5 FFC 9.7 Power 9 EFERT 9.5 Others 9.5 FATIMA 9.5 10 | P a g e
Perspective
Key Risks International fertilizer prices Further reduction in international fertilizer prices may restrict urea manufacturer’s pricing power to pass on any incremental cost (gas price) increase. Further increase in gas prices Although recently gas prices for fertilizer manufacturers have been revised upward by 62%‐23% for feed/fuel, any further increase may hurt the dynamics of the industry with limited pricing power. Government intervention Following increased urea prices of PkR159/bag consequent to the increase in gas prices by 62%/23% on feed/fuel, the GoP may intervene to support farmers at the expense of fertilizer industry. We believe a middle ground will be found where final urea price increase may be limited to PkR135/bag (see sensitivity table below) On the flipside, potential direct subsidies for farmers could be positive for fertilizer manufacturers. Urea Price increase
FFC TP‐Jun‐16 EFERT TP‐Jun‐16 FFBL TP‐Jun‐16 FATIMA TP‐Jun‐16 PkR159/bag
EPS CY16F Sensitivity with TPs
PkR135/bag (Base Case)
PkR100/bag
15.40 153.70 10.75 113.76 3.70 76.05 6.89 64.34 14.57 144.30 10.46 110.09 3.64 74.18 6.74 62.36 13.85 136.30 10.09 104.95 3.55 71.57 6.52 59.59 Source: IMS Research GIDC on new plants There is status quo on GIDC since Jul’14, with old plants paying GIDC at PkR300/mmbtu on feed gas whereas all plants are paying GIDC on fuel at PkR150/mmbtu. Any implication of GIDC on feed gas of contracted fixed gas players like FATIMA and EFERT will likely bode negatively for them. 11 | P a g e
Perspective
Fauji Fertilizer Co Ltd ‐ It’s all in the D/Y Bellwether FFC holds nearly 43% of Urea and 10% of the DAP market, inclusive of its trading operations. While FFC has transformed into the industry price setter, core fertilizer operations will likely remain unexciting. Respite comes from (i) 54% stake in AKBL (incl. FFBL holding) and (ii) high CY16F D/Y of 10.8%. • AKBL feeds into the group’s proclivity for dividends where it offers a forward D/Y of 13.8%, highest among Pakistan banking universe. Dividend stream from AKBL should negate core business pressures on 50% associate (FFBL) which is facing depressed primary DAP margins (US$204/ton) and is in the midst of capital intensive diversification. • Recent 62%‐23% feed/fuel gas price increase and consequent urea price increase (+PkR159/bag to PkR1,994/bag) has already been priced in. FFC is not a growth play from core fertilizer perspective, but it offers excellent D/Y (11.0%/10.8% on CY15F/16F) in a soft interest rate environment. Our TP of PkR144.3/share implies an Accumulate stance. • Fauji Fertilizer Co Ltd Price (PkR/sh) 132.09 TP (PkR/sh) 144.30 Stance Accumulate Upside 9.2% Fwd D/Y 10.8% Total Return 20.0% Bloomberg / Reuters FFC PA / FAUF.KA Mkt Cap (US$mn) 1,610.0 52wk Range (PkR/sh) 158.87‐112.6 3m Avg. D Vol ('000 shrs) 1,413 3m Avg. Td Val (US$mn) 1.99 The new urea price setter FFC ‐ Valuation Multiples EPS (PkR) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) EV/EBITDA (x) CY14A CY15F 14.28 15.48 9.25 8.53 20.18 21.16 6.55 6.24 13.65 14.50 10.3% 11.0% 70.8% 73.2% 6.92 6.28 Source: IMS Research CY16F CY17F 14.57 15.36 9.07 8.60 21.47 21.84 6.15 6.05 14.25 15.00 10.8% 11.4% 67.8% 70.4% 6.95 6.75 Further diversification – energy + LT bonds 40%
30%
20%
10%
0%
KSE100 Index FFC Sep‐15
Jul‐15
May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
‐10%
AKBL dividends are a bonus FFC acquired a 43% stake in AKBL (54% incl. FFBL holding) in Jul’13 from the Army Welfare Trust. While this transaction was ostensibly motivated by the need to bring AKBL into the Fauji Foundation umbrella ahead of the bank’s book cleaning and recapitalization, this investment is now paying off as it provides (i) direct exposure to Pakistan macro growth and (ii) another consistent D/Y stream (adequate CAR buffer). Regarding the latter, AKBL’s CY16F D/Y stands at 13.8% which cushions against any hiccup on 50% owned FFBL’s dividends given weak DAP margins and capital intensive diversification projects (meat & power), coupled with lag until these start paying dividends. We expect AKBL to contribute PkR1.08bn/PkR1.63bn in dividends to FFC in CY15F/16F. FFC vs. KSE100 Index
Source: IMS Research
The last few years saw EFERT as the urea price setter in Pakistan, price increases compensating for lost production due to gas scarcity, with FFC piggybacking on the same. With stable and cheaper gas supply at EFERT, the situation has reversed; FFC recently raised urea prices by PkR159/bag to PkR1,994/bag in response to a 62%‐
23% feed/fuel gas price increase. While this protects the company’s margins, it is an indication of risks on the core fertilizer business. Future pricing power in the face of any fresh cost push appears limited given small 9% discount to int’l urea prices. With anticipated government pressures to reduce urea prices, we have assumed PkR135/bag increase in urea prices, against PkR159/bag, that had earlier been announced. FFC Energy Ltd (wholly owned subsidiary) started commercial operations in May’13, running a 49.5MW wind power plant where we expect it to start paying dividends from CY16F onwards (pre‐tax impact of PkR0.25/share for FFC). Further bottom‐line support is expected from FFC’s PkR7.17bn investment in PIBs (5yrs to maturity) offering coupon of 11.75% (contributing pre‐tax EPS of PkR0.62/share) to FFC. Intermarket perspective The market has traditionally associated FFC with a high D/Y where previous 5yr NPAT CAGR of 10.5% has been an added sweetener. Going forward however, going by projected 5yr profit CAGR of 3.7%, FFC is likely to stand out mainly as a pure yield play particularly as domestic interest rates are likely to persist in the single digits across the medium‐term. FFC trades at a CY16F P/E of 9.0x and offers a CY16F DY of 10.8% which is attractive given (i) 12m T‐bill yield at 6.5% and (ii) the sponsor’s strong profile. We initiate with a ACCUMULATE stance based on our Jun’16 TP of PkR144.3/share offering 20% including CY16 D/Y of 10.8%. Risks: (i) constraints to pricing power in the face of further increase in input costs and/or reduction in int’l urea price and (ii) core business risks for FFBL and (iii) D/Y sustainability of AKBL. 12 | P a g e
Perspective
Fauji Fertilizer Co Ltd ‐ Charts Margin Trend Payout ratio
60%
50%
99%
98%
97%
96%
95%
94%
93%
92%
91%
40%
30%
20%
10%
0%
2013
2014 2015F 2016F 2017F 2018F
Gross Margin
Net Profit Margin
2012
Source: IMS Research
2012 2013 2014 2015F 2016F 2017F 2018F
Payout ratio
Source: IMS Research
Other income to PAT Contribution to other income 35%
30%
25%
20%
15%
10%
5%
0%
100%
80%
60%
40%
20%
64%
54%
12%
26%
33%
40%
35%
31%
29%
29%
42%
41%
0%
2012
2012 2013 2014 2015F 2016F 2017F 2018F
Other Income to PAT
Source: IMS Research
2013
2014
FFBL
FCCL
2015F 2016F 2017F 2018F
AKBL
FFCEL
Source: IMS Research
3,500 3,000 2,500 13% 2,000 5%
1,500 AKBL
FFBL
FFCEL
Source: IMS Research
CY15
Apr‐15
Jan‐15
Jul‐14
Oct‐14
Jan‐14
Apr‐14
Jul‐13
Oct‐13
Jan‐13
Urea Sona (FFC)
Core
Apr‐13
Jan‐12
Jul‐12
1,000 75%
Oct‐12
7%
Local to international urea price PkR/bag
Apr‐12
Valuation Contribution
Imported Urea price (PKR/bag)
Source: IMS Research
Headed for premium valuations
Yield comparison with PIB & T‐bills 25%
15%
10%
(x)
FFC ‐ PER (x) Band 20%
10.0 8.0 6.0 5%
0%
DY (%)
Source: IMS Research
Sep-15
Jan-15
Apr-14
Aug-13
Dec-12
Jul-11
PIB 10Y (%)
Mar-12
Nov-10
Jun-09
Feb-10
Oct-08
Jan-08
May-07
Sep-06
Jan-06
4.0 12M T-Bill (%)
Jan‐07
Sep‐08
Jun‐10
Mar‐12
Dec‐13
Sep‐15
Source: IMS Research
13 | P a g e
Perspective
Fauji Fertilizer Co Ltd ‐ Financials About the Company FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial share capital of the company was PkR813.9mn while the present share capital of the company stands above PkR12.72bn. FFC has more than PkR27.73bn as long term investments which includes stakes in subsidiaries FFC Energy Limited, Fauji Fresh n Freeze and associates FFBL & FCCL. Key Ratios EPS (PkR) EPS Growth (%) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) ROA (%) Debt to Equity (%) EV/EBITDA (x) EBITDA Margin Gross Margin CY13 15.83 ‐3.5% 8.35 19.77 6.68 15.35 11.6% 80.1% 29.7% 0.67 5.98 42.7% 46.4% CY14 14.28 ‐9.8% 9.25 20.18 6.55 13.65 10.3% 70.8% 21.0% 0.80 6.92 35.6% 38.3% CY15F 15.48 8.4% 8.53 21.16 6.24 14.50 11.0% 73.2% 31.2% 0.61 6.28 36.8% 38.5% CY16F 14.57 ‐5.9% 9.07 21.47 6.15 14.25 10.8% 67.8% 29.2% 0.58 6.95 32.1% 34.2% CY17F 15.36 5.5% 8.60 21.84 6.05 15.00 11.4% 70.4% 30.6% 0.56 6.75 32.6% 33.7% CY18F 15.87 3.3% 8.32 22.20 5.95 15.50 11.7% 71.5% 31.3% 0.54 6.61 32.5% 33.5% Profit & Loss Account (PkRmn) Net Revenue Cost of sales Gross profit Admin & Selling Exp. EBITDA Dep & Amortization EBIT Financial Charges Other income Other charges Profit before Tax Taxation Net Profit after Tax. CY13 74,481 39,949 34,532 6,167 31,834 1,660 30,175 756 4,368 2,558 29,419 9,284 20,135 CY14 81,240 50,137 31,103 6,432 28,935 1,846 27,090 849 4,721 2,303 26,241 8,070 18,171 CY15F 86,408 53,174 33,233 6,283 31,803 1,939 29,863 986 5,295 2,383 28,878 9,185 19,693 CY16F 89,327 58,744 30,583 6,640 28,703 2,036 26,667 924 4,888 2,163 25,743 7,212 18,531 CY17F 90,563 60,062 30,502 7,041 29,494 2,117 27,377 864 6,134 2,217 26,513 6,966 19,547 CY18F 92,516 61,532 30,983 7,489 30,031 2,202 27,829 823 6,586 2,252 27,006 6,819 20,187 Balance Sheet (PkRmn) Non‐Current Assets Total Current Assets Total Assets Share capital Reserves Surplus on revaluaton Total Equity Long Term Debt Total Non current Liabilities Short term Debt Total Current Liabilities Total Liabilities CY13 41,501 26,328 67,829 12,722 12,258 ‐ 25,151 4,280 8,358 7,000 34,320 42,678 CY14 50,678 35,883 86,562 12,722 12,484 ‐ 25,670 2,500 7,074 11,602 53,819 60,893 CY15F 51,005 12,123 63,128 12,722 13,729 ‐ 26,915 1,150 5,770 9,282 30,444 36,213 CY16F 50,777 12,776 63,553 12,722 14,131 ‐ 27,317 425 5,091 10,025 31,145 36,236 CY17F 50,665 13,221 63,886 12,722 14,594 ‐ 27,780 ‐ 4,713 10,325 31,393 36,106 CY18F 50,548 13,869 64,417 12,722 15,062 ‐ 28,248 ‐ 4,760 10,377 31,410 36,170 CY13 31,504 (14,758) (19,144) (2,398) 3,749 1,351 CY14 29,734 (11,565) (18,650) (481) 1,362 881 CY15F 22,486 (2,266) (19,752) 468 1,174 1,642 CY16F 20,679 (1,808) (18,808) 63 1,642 1,705 CY17F 21,188 (2,006) (19,462) (280) 1,705 1,425 CY18F 21,494 (2,085) (19,673) (263) 1,425 1,162 Cash Flow Statement (PkRmn) CF from Oper. Activities CF from Inv. Activities CF from Fin. Activities Net decrease/increase in cash Cash at beginning Cash at end of year 14 | P a g e
Perspective
Fauji Fertilizer Bin Qasim ‐ Giant in the making • Fauji Fertilizer Bin Qasim Price (PkR/sh) 61.02 TP (PkR/sh) 74.18 Stance BUY Upside 21.6% Fwd D/Y 5.3% Total Return 26.9% Bloomberg / Reuters FFBL PA / JORD.KA Mkt Cap (US$mn) 546.1 52wk Range (PkR/sh) 66.11‐39.89 3m Avg. D Vol ('000 shrs) 7,724 3m Avg. Td Val (US$mn) 4.49 FFBL ‐ Valuation Multiples EPS (PkR) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) EV/EBITDA (x) • CY14A CY15F CY16F 4.30 3.76 3.64 14.19 16.23 16.78 15.26 14.79 15.18 4.00 4.12 4.02 4.00 3.25 3.25 6.6% 5.3% 5.3% 28.2% 25.4% 24.0% 11.56 11.98 8.10 Source: IMS Research CY17F 6.40 9.53 16.08 3.79 5.50 9.0% 39.8% 7.01 • Ongoing diversification strategy including Fauji Meat Limited, FFBL Power Company and NOPK, on top of AKBL, has changed FFBL’s complexion from a pure fertilizer play to an emergent conglomerate, reflected by its share price rally of 31.8%CYTD. Core business dynamics are unexciting with margins likely to remain under pressure; CY15F profits are projected to decline by 12.5%YoY with flat earnings expected in CY16F. However, new venture in pipeline is strong – commercial operation of meat business is expected shortly (1QCY16) while financial close of the power business falls in Dec’15. As a result, CY15F‐CY18F NPAT CAGR comes to 26%. FFBL trades at a CY16F P/E of 16.7x which drops to 9.5x on CY17F earnings estimates. We believe swift medium‐term growth prospects justify premium valuations in the interim period where our DCF based Jun’16 TP of PkR74.2/share offers 26.9% upside including CY16F D/Y of 5.3%. Lower primary DAP margins FFBL derives ~86% of its revenues from DAP and has been facing the brunt of falling int’l DAP prices where current primary DAP margins have shrunk to US$204/ton (‐7%YoY). We expect primary DAP margins to remain range‐bound between US$210‐US$220/ton in the medium term implying a subdued core operations outlook. This will also be a function of recent increase in gas prices by 62%/23% for feed/fuel for the fertilizer industry where FFBL’s core margins are estimated at 18.3%/16.9% for CY15F/16F vs. 26.6%/22.4% for CY13/14. A bet on non‐core businesses Given concerns on the core business, FFBL is aggressively looking to diversify into the Energy and Food industries, on top of existing 21.6% stake in AKBL. In this regard, we expect AKBL’s dividends to contribute 15%/18% of FFBL’s PBT in CY15F/16F. At the same time, we expect Foundation Wind Energy I & II (35% stake in each) to start paying dividends from CY16F onwards. Our preliminary estimates suggest dividend from both wind energy projects could reach PkR0.33/share of FFBL in CY16F. ‐ Fauji Meat Limited Our preliminary estimates suggest that Fauji Meat Limited (FML) can earn PkR0.27/0.80 per share of FFBL in CY15/16F given the plant meet its expected target of achieving 100% utilization by CY16 (top‐line of PkR20‐25bn in a full year). We believe FML can justifiably be valued at a target P/E of 20x (GMs: 8%), compared with food sector’ average P/E of 30x and Al Shaheer’s IPO P/E of 35x. Tax exempt status to new Halal meat plants (until CY19F) would also be an added advantage. ‐Power! FFBL vs. KSE100 Index 80%
60%
40%
20%
0%
KSE100 Index Source: IMS Research FFBL Sep‐15
Jul‐15
May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
‐20%
Of FFBL’s ventures, FFBL Power Company (118MW coal based power plant) should be the major driver for earnings. The company plans to sell 52MW to K‐Electric (KEL) whereas remaining power will be sold to FFBL’s fertilizer complex which should atleast release ~15mmcfd of gas, allowing the company to produce 195k tons of additional urea. The incremental impact of the additional urea sold would be PkR1.75/share of FFBL. We estimate the power plant alone to contribute PkR8.0/share to FFBL’s TP while a 9x target P/E on additional urea production = PkR15.75/share. As such, the power plant and consequent urea production are implicitly contributing 34% to our TP for FFBL. Intermarket perspective FFBL trades at CY16F P/E of 16.8x which compresses to 9.5x on CY17F earnings, while projected CY15F‐18F NPAT CAGR comes to 26%. We believe the market has already started to price‐in FFBL’s upcoming ventures where projected swift medium‐term growth justifies premium multiples. Our Jun’16 TP of 74.2/share implies a Buy stance. Risks: Execution risk w.r.t. upcoming projects particularly in the power space where a delay/cancellation would make it difficult to justify current valuations. 15 | P a g e
Perspective
Fauji Fertilizer Bin Qasim ‐ Charts Gas Curtailment Payout ratio trend
100
75
50
100%
95%
90%
85%
25
80%
‐ 0
CY09
CY10
CY11
Gas Allocated (mmcf/365)
CY12
75%
2012 2013 2014 2015F 2016F 2017F 2018F
CY13
CY14
Payout ratio
Gas Supplied (mmcf/365)
Source: IMS ResearchError! Not a valid link.
Source: IMS ResearchError! Not a valid link.
NP offtake to phosphate fertilizer is increasing…
Local DAP Margins
DAP
CY11
NP
Source: IMS Research
CY15F
CY15E
CY10
Jan‐15
CY09
0%
CY12 CY13 CY14
NP/DAP replacement ‐ (Rhs)
Jul‐14
0
10%
Jan‐14
Jul‐13
500
20%
Jan‐13
Jul‐12
1,000
Jan‐12
400 350 300 250 200 150 Jul‐11
1,500
30%
Jan‐11
Jul‐10
'000 tons
2,000
Jan‐10
Primary Margins (USD/ton)
Source: IMS Research
Primary margins/ton of Ammonia Contribution to other income from current investments
200%
100%
160%
80%
120%
80%
40%
40%
20%
0%
CY09
CY10
CY11
CY12
DAP Gross Margins
60%
CY13 CY14 CY15F
Urea GrossMargins
Source: IMS Research
0%
43%
41%
26%
24%
0%
0%
2012 2013 2014 2015F 2016F 2017F 2018F
FFBLPC
FML
FWEI & II
AKBL
FCCL
26%
Source: IMS Research
Valuation Contribution
FFBL PER Band
16%
FFBL ‐ PER (x) Band 46%
10%
(x)
16.0 12.0 8.0 4.0 23% 1% 4%
AKBL
Source: IMS Research
FML
FFBLPC
FWEI&II
FCCL
Core
Jan‐07
Sep‐08
Jun‐10
Mar‐12
Dec‐13
Sep‐15
Source: IMS Research.
16 | P a g e
Perspective
Fauji Fertilizer Bin Qasim ‐ Financials Key Ratios EPS (PkR) EPS Growth (%) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) ROA (%) Debt to Equity (%) EV/EBITDA (x) EBITDA Margin Gross Margin About the Company Fauji Fertilizer Bin Qasim Limited Plant site is a modern Granular Urea and Di‐Ammonium Phosphate (DAP) fertilizers manufacturing complex, built at a cost of US$468mn and is located in Eastern Zone of Bin Qasim, Karachi. FFBL is the only fertilizer complex in Pakistan producing DAP fertilizer and Granular Urea thus making significant contribution towards agricultural growth of the country by meeting 50% of the demand of DAP and 4% of Urea in domestic market. Additionally, FFBL has more than PkR16.70bn as long term investments which include stakes in subsidiaries Fauji Meat Limited, FFBL Power Company and associates Fauji Wind Energy I, Fauji Wind Energy II, AKBL & FCCL. CY13 6.01 0.0% 10.15 13.75 4.44 5.00 8.2% 44.9% 15.9% 1.09 9.22 21.0% 26.7% CY14 4.30 ‐28.5% 14.19 15.26 4.00 4.00 6.6% 28.2% 8.5% 1.29 11.56 17.2% 22.4% CY15F 3.76 ‐12.6% 16.23 14.79 4.12 3.25 5.3% 25.4% 7.5% 1.28 11.98 14.0% 18.3% CY16F 3.64 ‐3.2% 16.78 15.18 4.02 3.25 5.3% 24.0% 7.8% 1.01 8.10 12.9% 16.9% CY17F 6.40 76.0% 9.53 16.08 3.79 5.50 9.0% 39.8% 13.4% 0.83 7.01 16.4% 19.5% CY18F 7.53 17.7% 8.10 17.37 3.51 6.25 10.2% 43.4% 16.4% 0.55 6.62 17.9% 21.1% CY13 54,455 39,943 14,513 4,507 11,432 1,361 10,071 1,515 657 629 8,518 2,749 5,770 CY14 49,445 38,353 11,092 4,632 8,491 1,339 7,152 1,313 1,063 430 5,780 1,764 4,016 CY15F 50,735 41,444 9,291 4,888 7,079 1,373 5,706 1,148 1,592 319 4,528 1,017 3,512 CY16F 52,109 43,299 8,810 5,166 6,732 1,379 5,353 951 1,988 308 4,373 975 3,398 CY17F 60,095 48,395 11,700 6,050 9,828 1,389 8,439 713 3,458 698 7,696 1,715 5,981 CY18F 61,648 48,670 12,977 6,491 11,056 1,402 9,653 528 3,934 797 9,096 2,058 7,037 Balance Sheet (PkRmn) Non‐Current Assets Total Current Assets Total Assets Share capital Reserves Surplus on revaluaton Total Equity Long Term Debt Total Non current Liabilities Short term Debt Total Current Liabilities Total Liabilities CY13 22,060 14,162 36,222 9,341 3,273 ‐ 12,843 584 4,042 7,985 19,335 23,377 CY14 25,482 21,996 47,478 9,341 3,773 ‐ 14,253 10,000 13,317 3,087 19,908 33,225 CY15F 28,236 18,563 46,799 9,341 4,249 ‐ 13,818 10,000 13,400 2,500 19,580 32,981 CY16F 27,242 16,369 43,611 9,341 4,610 ‐ 14,180 8,208 11,693 625 17,738 29,431 CY17F 26,244 18,510 44,754 9,341 5,454 ‐ 15,023 6,222 9,794 156 19,937 29,731 CY18F 25,272 17,692 42,964 9,341 6,653 ‐ 16,222 3,753 7,414 39 19,328 26,742 Cash Flow Statement (PkRmn) CF from Oper. Activities CF from Inv. Activities CF from Fin. Activities Net decrease/increase in cash Cash at beginning Cash at end of year CY13 6,045 (6,823) (5,534) (6,311) 8,789 2,478 CY14 1,131 (3,674) 5,539 2,997 2,480 5,476 CY15F 7,999 (5,051) (2,953) (6) 5,474 5,469 CY16F 1,665 (399) (4,743) (3,477) 5,469 1,992 CY17F 6,885 (404) (7,037) (556) 1,992 1,436 CY18F 8,641 (445) (8,218) (22) 1,436 1,414 Profit & Loss Account (PkRmn) Net Revenue Cost of sales Gross profit Admin & Selling Exp. EBITDA Dep & Amortization EBIT Financial Charges Other income Other charges Profit before Tax Taxation Net Profit after Tax. 17 | P a g e
Perspective
Engro Fertilizer Ltd – Smoother sailing • Engro Fertilizer Ltd Price (PkR/sh) 91.97 TP (PkR/sh) 110.02 Stance BUY Upside 19.6% Fwd D/Y • 8.7% Total Return 28.3% Bloomberg / Reuters EFERT PA / ENGR.KA Mkt Cap (US$mn) 1,172.7 52wk Range (PkR/sh) 99.19‐53.5 3m Avg. D Vol ('000 shrs) 3,336 3m Avg. Td Val (US$mn) 3.01 • Application of concessionary gas (US$0.70/mmbtu) since Mar’15 on MARI and SNGPL (99 mmcfd) networks coupled with continued gas supply from Guddu power plant has resulted in an impressive turnaround – 1HCY15 profits were up 103%YoY led by 11% YoY higher offtake and improved GMs of 37% (+1.2ppt YoY). Extension of Guddu gas (GTPS) for another year is allowing the company to run both plants at > 80% utilization. Strong cash generation and EBITDA (CY14: PkR33bn) should allow EFERT to retire its long term debt swiftly; we expect D/E to improve from 1.43 in CY14 to 0.44 in CY17F. Risks to gas availability post CY15F may hinder EFERT (P/E ‐ CY15F: 7.3x; CY16F: 8.8x) from achieving its full potential. While further extension in GTPS is a possibility, we do not factor it in our financial model beyond this calendar year, which leads to a base‐case DCF‐derived TP of PkR110.0/share. Assuming GTPS gas extension beyond CY15 for next two years, our bull‐case TP PkR137.8/share (bull CY16F/CY17F EPS: PkR13.6/14.7). Full circle EFERT‐ Valuation Multiples EPS (PkR) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) EV/EBITDA (x) CY14A CY15F 6.17 12.69 14.91 7.25 25.91 29.52 3.55 3.12 3.00 7.50 3.3% 8.2% 23.8% 43.0% 6.13 4.55 Source: IMS Research CY16F 10.46 8.79 31.98 2.88 8.00 8.7% 32.7% 4.85 CY17F 11.51 7.99 35.00 2.63 8.50 9.2% 32.9% 4.47 EFERT was the industry urea price setter over the last few years, pursuing its need to increase prices emanating from production cuts owing to gas scarcity, with peers following suit. The situation has reversed on receipt of GTPS gas and approval of US$0.70/mmbtu feedstock gas since Mar’15. As a result EFERT is now a price follower where it will piggyback on any urea price increase by peers and experience margin expansion. Case in point is recent PkR159/bag urea price increase by FFC following an administered gas price increase – this will take EFERT’s urea product margins to 59% in CY16F vs. 53% in CY15F. Eximp’s +ve contribution! Eximp is expected to add PkR0.91/1.17 per share in CY15F/CY16F as the trading wing enjoys significant market share of ~25% in DAP. Going forward, this can augment as concerns over gas curtailment are not yet over for FFBL, the sole manufacturer of DAP in Pakistan. This can potentially lead to +ve earnings surprises for EFERT going forward (CY15F/CY16F EPS: PkR0.91/1.17). Expect bumper earnings in CY15F EFERT will likely post all‐time high NPAT of PkR17.1bn (EPS: PkR12.69) in CY15F, up by 106%YoY, on account of (i) extension of gas from GTPS till Dec’15, (ii) recent amalgamation of Eximp into EFERT (EPS impact: PkR0.91), (iii) margin expansion by 12.4ppt to 49.4% (ex. Eximp) and (iv) one‐off allowance of tax credits due to reduction in future corporate tax rates to 30% from 33% going forward. EFERT vs. KSE100 index
100%
Medium‐term outlook 80%
60%
40%
20%
0%
KSE100 Index Source: IMS Research EFERT Sep‐15
Jul‐15
May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
‐20%
With feed gas pricing at US$0.70/mmbtu, EFERT’s fortunes depend on GTPS gas – which should be available at least until CY15 end. Beyond CY15, EFERT has three options: (i) possible extension of GTPS for another year, which is very likely since the management is still in talks with GoP (ii) KPD gas, although channel checks suggest no progress on the field and (iii) running plants on LNG where price at even US$10/mmbtu can allow the company to earn 54% primary margins/ton of ammonia produced and urea product margins of 10%. In our financial model, we build in GTPS gas only until end‐CY15F with no replacement after that to run the old plant. Investment perspective EFERT has gained 17.7%CYTD to trade at a CY15F P/E of 7.3 (CY16F P/E: 8.8) where our base‐case TP of PkR110.0/share offers 28.3% upside including forward D/Y of 8.7%. In this regard, our bull‐case TP rises to PkR137.8/share if Guddu gas is extended in favor of EFERT beyond CY15 (bull CY16F/CY17F EPS: PkR13.6/14.7). Risks: Risks to our investment thesis include (i) discontinuation of GTPS gas and failure to adequately replace it across the medium‐term. 18 | P a g e
Perspective
Engro Fertilizer Ltd ‐ Charts EPS Contribution (PkR/Share) Gross margin contribution by product 18
15
12
9
6
3
0
‐3
1.17 1.09 0.91 3.49 3.13 3.52 3.17 6.17 9.28 10.42 CY13
CY14
CY15F CY16F CY17F
EPS with KPD EPS with Guddu
EPS Base
Source: IMS Research
91%
85%
(2.20)
CY12
Eximp
7%
95%
9%
9%
8%
88%
89%
89%
CY17F
Urea
CY18F
90%
11.76 4.13 100%
80%
CY15F
DAP
CY16F
NPK
NP
Source: IMS Research
Offtake by Product '000 tons
315
1,400
938
1,260
400
255 288
949
900
434
27%
364
41%
1,820
1,900
1,560
2,400
Production Mix CY15F
Tons ‐100
CY10
CY11
CY12 Zakhez
DAP 32%
CY13
CY14
Urea
Urea
Source: IMS Research
DAP
NP/NPK
Source: IMS Research
Cheapest on Valuation multiples
25,000 Debt Profile
20.0 20,000 10,000 5,000 3.0
10.0 2.0
5.0 1.0
‐
CY12
12,000
10,000
8,000
6,000
4,000
2,000
0
4.0
15.0 15,000 PkR (mns)
5.0
0.0
CY15F CY16F CY17F CY18F CY12 CY13 CY14 CY15E
CY16E CY17E CY18E
Debt to Equity (x)
Debt / Assets (x)
Finance Cost ‐ Rhs
‐
CY13 CY14 CY15F
CY16F CY17F
EBITDA/ton (PkR)
EV/EBITDA (Rhs)
Source: IMS Research
Source: IMS Research
EFERT – PER Band
Price discount between DAP and NP 5,000 4,000 3,000 2,000 (x)
40%
20%
8.0 10%
6.0 12.0 30%
1,000 EFERT ‐ PER (x) Band ‐
10.0 0%
CY12
DAP
Source: IMS Research
CY13
NP
CY14
CY15F
DAP to NP discount (Rhs)
Jan‐14
Apr‐14 Aug‐14 Nov‐14 Feb‐15 May‐15 Sep‐15
Source: IMS Research
19 | P a g e
Perspective
Engro Fertilizer Ltd ‐ Financials About the Company Engro Fertilizers Limited is a subsidiary of Engro Corporation and a renowned name in Pakistan’s fertilizer industry. Engro Fertilizers Limited was incorporated in Jun’09, following a decision to demerge fertilizer concern from its parent company. Engro Fertilizers is poised to become the leading urea manufacturer in the country following major upgradation of its manufacturing capabilities (ENVEN 1.3mn tpa which went into production in November 2010). Key Ratios EPS (PkR) EPS Growth (%) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) ROA (%) Debt to Equity (%) EV/EBITDA (x) EBITDA Margin Gross Margin Profit & Loss Account (PkRmn) Net Revenue Cost of sales Gross profit Admin & Selling Exp. EBITDA Dep & Amortization EBIT Financial Charges Other income Other charges Profit before Tax Taxation Net Profit after Tax. CY13 4.13 21.9% 5.0% 2.53 7.50 43.9% 44.1% CY14 6.17 49.3% 14.91 25.91 3.55 3.00 3.3% 23.8% 7.4% 1.43 6.13 37.8% 36.8% CY15F 12.69 105.7% 7.25 29.52 3.12 7.50 8.2% 43.0% 18.0% 1.04 4.55 35.7% 38.0% CY16F 10.46 ‐17.6% 8.79 31.98 2.88 8.00 8.7% 32.7% 15.5% 0.67 4.85 35.2% 37.3% CY17F 11.51 10.1% 7.99 35.00 2.63 8.50 9.2% 32.9% 17.4% 0.45 4.47 35.2% 37.7% CY18F 12.22 6.1% 7.53 38.22 2.41 9.00 9.8% 32.0% 18.2% 0.33 4.16 34.6% 37.4% CY13 50,129 28,008 22,121 4,112 22,010 4,956 17,054 8,670 1,105 2,060 8,384 2,887 5,498 CY14 61,425 38,822 22,603 5,214 23,246 4,725 18,521 6,625 2,449 1,318 11,895 3,687 8,208 CY15F 92,120 57,136 34,984 6,020 32,842 4,491 28,351 4,589 1,710 2,323 23,762 6,877 16,886 CY16F 79,361 49,780 29,581 5,245 27,957 4,281 23,676 3,627 1,255 1,915 20,049 6,128 13,921 CY17F 80,786 50,307 30,479 5,425 28,446 4,085 24,361 2,483 1,358 2,050 21,878 6,553 15,325 CY18F 82,482 51,594 30,888 5,631 28,554 3,901 24,653 1,683 1,533 2,137 22,970 6,703 16,267 Balance Sheet (PkRmn) Non‐Current Assets Total Current Assets Total Assets Share capital Reserves Surplus on revaluaton Total Equity Long Term Debt Total Non current Liabilities Short term Debt Total Current Liabilities Total Liabilities CY13 79,563 30,366 109,929 12,228 10,880 ‐ 25,069 52,896 62,186 ‐ 22,673 109,929 CY14 75,175 36,297 111,472 13,183 19,088 ‐ 34,478 36,091 41,437 ‐ 35,556 111,472 CY15F 70,483 23,225 93,708 13,309 25,991 ‐ 39,291 23,701 28,460 ‐ 25,957 93,708 CY16F 67,202 22,810 90,011 13,309 29,265 ‐ 42,565 16,464 21,222 ‐ 26,224 90,011 CY17F 64,127 23,962 88,089 13,309 33,277 ‐ 46,577 11,913 16,672 ‐ 24,841 88,089 CY18F 61,247 28,015 89,262 13,309 37,565 ‐ 50,865 7,581 12,339 ‐ 26,058 89,262 Cash Flow Statement (PkRmn) CF from Oper. Activities CF from Inv. Activities CF from Fin. Activities Net decrease/increase in cash Cash at beginning Cash at end of year CY13 (7,131) 3,820 6,727 3,416 2,449 5,865 CY14 19,615 4,819 (24,164) (270) 4,458 4,189 CY15F 21,786 (1,890) (22,959) (3,063) 4,189 1,126 CY16F 19,340 (1,000) (17,885) 455 1,126 1,580 CY17F 15,159 (1,010) (15,863) (1,715) 1,580 (134) CY18F 17,101 (1,020) (16,311) (231) (134) (365) 22.27 18.84 4.88 20 | P a g e
Perspective
Fatima Fertilizer Co Ltd – ‘CAN’ny! • Fatima Fertilizer Co Ltd Price (PkR/sh) 46.94 TP (PkR/sh) 62.38 Stance BUY Upside 32.9% Fwd D/Y 6.9% Total Return 39.8% FATIMA PA / FATF.KA Bloomberg / Reuters Mkt Cap (US$mn) 981.6 52wk Range (PkR/sh) 50.68‐27.38 3m Avg. D Vol ('000 shrs) 1,052 3m Avg. Td Val (US$mn) 0.46 CY14A CY15F CY16F 4.41 6.18 6.74 10.65 7.60 6.97 17.50 20.68 24.17 2.68 2.27 1.94 2.75 3.00 3.25 5.9% 6.4% 6.9% 25.2% 29.9% 27.9% 6.84 6.05 5.08 Source: IMS Research • Capitalizing on Fundamentals FATIMA is the only player in the industry whose capacity has not been exhausted yet in terms of urea production, unlike others who are prone to gas supply curtailment. Furthermore, ammonia revamp of additional 100tpd is expected to come online by Dec’15 with impact to reflect from CY16F onwards. Result of ammonia revamp Phase I should open prospects for phase II revamp of 200tpd which was earlier expected in CY18. FATIMA Fertz‐ Valuation Multiples EPS (PkR) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) EV/EBITDA (x) • With diversified product categories (Urea/CAN/NP), FATIMA realizes premium GMs of 59% particularly as the company enjoys presence on MARI network (90% gas supply) and also receives concessionary US$0.70/mmbtu feed gas pricing. FATIMA is our preferred play for core fertilizer exposure, our liking reinforced by recent industry‐wide urea price increase by PkR159/bag (following 62%/23% feed/fuel gas price increase for old fertilizer plants). FATIMA is likely to follow suit, effectively resulting in a free lunch for the company. We see FATIMA’s GMs at 63.9% in CY16F vs.59.0% in CY15F and 59.3% in CY14. FATIMA is our preferred play for core fertilizer exposure; despite its 31.2%CYTD price run‐up, we remain bullish on sustained strong fundamentals where our Jun’16 TP of PkR62.4/share offers upside of 39.8% including D/Y of 6.9%. Buy! CY17F 7.06 6.65 27.73 1.69 3.50 7.5% 25.5% 4.89 Mix preferring high margin products FATIMA’s product mix is tilted towards complex fertilizers (CAN & NP) which is justified as NP/CAN provide more than 187%/179% primary margins per ton of ammonia consumed against 106% on Urea. We expect this trend to continue since it is the most efficient use of available gas. That said, Pak Arab Fertilizer’s current operations to make CAN/NP on LNG may force FATIMA to tilt its production mix more towards Urea if cannibalization takes place. Hefty cash generation coupled with 350bps cut in rate! We believe FATIMA’s competitive edge allows excellent cash generation to repay its LT debt. Current long term debt to equity ratio stands at 0.66x against 0.94x in CY13, reflective of swift deleveraging by the company amidst strong cash flow generation. In this regard, finance costs have come off from PkR4.1bn in CY13 to PkR3.7bn in CY14 and are further expected to reduce by 44%YoY in CY15F to PkR2.1bn in CY15. Other than repayment, this is a function of hefty 350bps cut in the DR since Sep’14. While we expect interest rates to begin rising from CY16F onwards, the DR should comfortably remain within single digits across the medium‐term. FATIMA Fertz‐ Valuation Multiples
What about DH Fertilizers? 100%
80%
60%
40%
20%
0%
KSE100 Index Source: IMS Research FATIMA Sep‐15
Jul‐15
May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
‐20%
Recently FATIMA acquired 100% stake of DH Fertilizer for PkR2bn (urea production capacity of 450ktpa) which remains non‐operational for now because of absence of gas. While it is difficult to say for certain, we flag that recent hike in urea prices (MRP approx. PkR2,039/bag) has opened up possibilities of using LNG to manufacture urea even at US$10/mmbtu (allowing 54% primary margins/ton of ammonia consumed for manufacturing urea). As a result, possibility of running DH Fertilizer on LNG, and thereby resuming production earlier than expected, cannot be ignored. In this regard, management also seems confident regarding resolution of gas issues of DH Fertilizer in near future. Investment Perspective FATIMA is currently trading at CY15F/16F PE of 7.6x/7.0x vs. medium term industry average of 9.0x (core business multiple), which offers room for multiple rationalization. Our Jun’16 TP of PkR62.3/share offers 39.8% upside including 6.9% forward D/Y. Buy! Risks: Key risks to our valuation include (i) swift rise in discount rate and (ii) longer than expected closure of ammonia plant (expected one month) due to revamp process. 21 | P a g e
Perspective
Fatima Fertilizer Co Ltd – Charts Debt Profile Profitability measures
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
40%
30%
20%
10%
2012
0%
2014 2015E 2016E 2017E 2018E
2013
Debt/Equity (x)
Net profit change (Rhs)
70%
60%
50%
40%
30%
20%
10%
0%
CY13
Debt/Assets (x)
Source: IMS Research
CY14
CY15F
Gross margin
CY16F
ROE
CY17F
Source: IMS Research
Primary margins/ton of Ammonia Margin comparison by product
280%
240%
200%
160%
120%
80%
40%
0%
80%
60%
CY13
CY14
40%
20%
CY16F
CY15F
CY17F
0%
CY13
NP Margins/ton of Ammonia
Urea Margins/ton of Ammonia
CAN‐Product Margins Source: IMS Research
2,500 2,000 2,500 1,500 1,500 1,000 500 Jan‐10
Apr‐10
Jul‐10
Oct‐10
Jan‐11
Apr‐11
Jul‐11
Oct‐11
Jan‐12
Apr‐12
Jul‐12
Oct‐12
Jan‐13
Apr‐13
Jul‐13
Oct‐13
Jan‐14
Apr‐14
Jul‐14
Oct‐14
Jan‐15
Apr‐15
CY15E
DAP (PkR/bag)
CY17F
500 Jan‐10
Apr‐10
Jul‐10
Oct‐10
Jan‐11
Apr‐11
Jul‐11
Oct‐11
Jan‐12
Apr‐12
Jul‐12
Oct‐12
Jan‐13
Apr‐13
Jul‐13
Oct‐13
Jan‐14
Apr‐14
Jul‐14
Oct‐14
Jan‐15
Apr‐15
CY15E
3,500 CY16F
Urea‐Product Margins
CAN discount to Urea
4,500 CY15F
Source: IMS Research
NP discount to DAP CY14
NP Product Margins
CAN‐Product Margins
Urea (PkR/bag)
NP (PkR/bag)
CAN (PkR/bag)
Source: IMS Research
Source: IMS Research
Production Mix FATIMA PER band
(x)
FATIMA Fertz. ‐ PER (x) Band 11.0 32%
31%
9.0 7.0 5.0 37%
Urea
Source: IMS Research
CAN
Jan‐11
Dec‐11
Nov‐12
Oct‐13
Sep‐14
Sep‐15
NP
Source: IMS Research
22 | P a g e
Perspective
Fatima Fertilizer Co Ltd ‐ Financials Key Ratios EPS (PkR) EPS Growth (%) P/E (x) BVPS (PkR) P/BV (x) DPS (PkR) DY (%) ROE (%) ROA (%) Debt to Equity (%) EV/EBITDA (x) EBITDA Margin Gross Margin About the Company Fatima Fertilizer Company Limited is the first and the only green field project which has materialized under the 2001 Fertilizer Policy of the Government of Pakistan, aiming to encourage investors in this field, in view of growing demand of fertilizer in the Country. Receiving feed gas at US$0.70/mmbtu and also experiencing limited gas shortage, FATIMA has one of the most secure business models among the Pakistan Fertilizer space. CY13 CY14 CY15F CY16F CY17F 3.82 4.41 6.18 6.74 7.06 CY18F 7.11 0.0% 15.4% 40.1% 9.0% 4.9% 0.7% 12.29 10.65 7.60 6.97 6.65 6.60 15.60 17.50 20.68 24.17 27.73 31.09 3.01 2.68 2.27 1.94 1.69 1.51 2.50 2.75 3.00 3.25 3.50 3.75 5.3% 5.9% 6.4% 6.9% 7.5% 8.0% 24.5% 25.2% 29.9% 27.9% 25.5% 22.9% 10.1% 11.1% 14.9% 15.2% 15.4% 15.3% 0.94 0.66 0.46 0.34 0.21 0.09 7.48 6.84 6.05 5.08 4.89 4.74 53.8% 53.9% 53.5% 57.4% 56.6% 55.1% 59.1% 59.3% 59.0% 63.9% 63.1% 61.5% Profit & Loss Account (PkRmn) Net Revenue Cost of sales Gross profit Admin & Selling Exp. EBITDA Dep & Amortization EBIT Financial Charges Other income Other charges Profit before Tax Taxation Net Profit after Tax. CY13 33,496 13,713 19,783 2,529 18,025 1,536 8,152 4,169 246 1,010 12,321 4,298 8,022 CY14 36,169 14,708 21,461 2,795 19,491 1,575 10,382 3,767 624 1,374 14,149 4,891 9,258 CY15F 39,399 16,149 23,250 3,080 21,091 1,708 15,131 2,126 521 1,308 17,257 4,284 12,973 CY16F 41,925 15,130 26,795 3,289 24,072 1,791 19,322 1,480 307 1,532 20,802 6,657 14,145 CY17F 42,881 15,833 27,047 3,458 24,290 1,898 20,599 896 359 1,556 21,496 6,664 14,832 CY18F 43,090 16,608 26,482 3,596 23,744 1,984 20,915 422 421 1,547 21,337 6,401 14,936 Balance Sheet (PkRmn) Non‐Current Assets Total Current Assets Total Assets Share capital Reserves Surplus on revaluaton Total Equity Long Term Debt Total Non current Liabilities Short term Debt Total Current Liabilities Total Liabilities CY13 67,726 11,564 79,290 21,000 9,969 ‐ 32,759 22,647 31,256 2,303 15,275 46,531 CY14 68,952 14,169 83,121 21,000 13,967 ‐ 36,757 17,335 31,756 600 14,608 46,364 CY15F 72,302 14,620 86,921 21,000 20,640 ‐ 43,430 13,517 29,011 ‐ 14,481 43,491 CY16F 74,332 18,486 92,818 21,000 27,960 ‐ 50,750 10,653 26,950 1,000 15,118 42,068 CY17F 78,085 18,021 96,106 21,000 35,442 ‐ 58,232 6,989 24,203 1,000 13,671 37,874 CY18F 78,925 18,550 97,475 21,000 42,503 ‐ 65,293 4,819 22,610 1,000 9,572 32,182 Cash Flow Statement (PkRmn) CF from Oper. Activities CF from Inv. Activities CF from Fin. Activities Net decrease/increase in cash Cash at beginning Cash at end of year CY13 8,580 (550) (8,776) (746) 984 238 CY14 8,272 (2,286) (5,275) 711 238 949 CY15F 16,272 (5,057) (9,046) 2,169 949 3,118 CY16F 15,508 (3,821) (8,885) 2,802 3,118 5,920 CY17F 14,272 (5,651) (10,097) (1,476) 5,920 4,445 CY18F 11,806 (2,824) (9,468) (486) 4,445 3,959 23 | P a g e
Perspective
I, Abdul Samad Khanani, certify that the views expressed in the report reflect my personal views about the subject securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. I further certify that I do not have any beneficial holding of the specific securities that I have recommendations on in this report. Ratings Guide Buy Upside more than 20% Accumulate Upside more than 10% but less than or equal to 20% Neutral Upside from 0% to 10%; Downside from 0% to ‐10% Reduce Downside more than 10% but less than or equal to 20% Sell Downside more than 20% Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions and estimates herein are not direct at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject Intermarket Securities Limited to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable where such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correction. This report makes use of forward looking statements that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties that could cause the actual results to differ materially. This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this report, you should consider whether it is suitable for your particular circumstances and, if appropriate, see professional advice. Neither Intermarket Securities Limited nor any of its affiliates or any other person connected with the company accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. Subject to any applicable law and regulations, Intermarket Securities Limited, its affiliates or group companies or individuals connected with Intermarket Securities Limited may have used the information contained herein before publication and may have positions in, or may from time to time purchase or sell or have a material interest in any of the securities mentioned or may currently or in future have or have had a relationship with, or may provide investment banking, capital markets and/or other services to, the entities mentioned herein, their advisors and/or any other connected parties. This document is being distributed in the United States solely to “major institutional investors” as defined in Rule 15a‐6 of the US Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each US person that receives this report by its acceptance thereof represents and agrees that it: is a “major institutional investor” as so defined, and understands the whole document. Investors should contact their Intermarket Securities representative if they have questions concerning this report. 24 | P a g e