31st, October, 2007
Fauji Fertilizers
Cultivating Riches!
Key Stats
FFC
O/S shares (mn)
493
Market Capitalization (USD mn)
With 20.1% of Pakistan’s GDP dependent on agriculture, the sector will
continue to play a vital role in the country’s economic well-being going
forward. GDP growth estimated to remain above 6% in the medium term
bodes well with fertilizer offtake. Given the current urea and DAP shortfall,
major players of the sector are adopting aggressive enhancement
programs which would enable them to capitalize on the market conditions
ƒ
Revenues of fertilizer companies are expected to rise with rising urea and
DAP prices where we expect them to register 6-year CAGR (CY06-12E) of
5.5% and 6.2% respectively. Urea offtake during Kharif’07 was 2.64 mn
tons, witnessing a 10.4% YoY growth while DAP offtake recorded a 64.1%
YoY growth to reach 0.64mn tons
ƒ
Budget FY08 contains several incentives announced for the fertilizer
sector. Measures include, increase in subsidy on DAP, further relief in the
form of 25% reduced electricity charges for tube-wells, availability of high
acreage seeds at subsidized rates, and increase in support prices of main
crops
ƒ
FFC enjoys an assured demand for its domestically manufactured product
as well as imports. Strong identity and recognition of its brand 'Sona'
allows FFC to charge a premium price. FFBL on the other hand has the
edge of being the only DAP producer in Pakistan. Focus of the government
towards a more balanced use of fertilizers encourages use of DAP which
bodes well with FFBL
ƒ
Investment in Pak-Maroc Phosphore (PMP) by the two fertilizer
companies, FFC & FFBL will yield fruits in future. (1) Dividends are
expected to flow from CY09 as the production is expected to commence in
CY08. (2) Availability of phosphoric acid at a cheaper price which is a
major raw-material for manufacturing DAP
ƒ
FFC and FFBL are expected to maintain high payout ratio despite
investment in several projects which provides a safety cushion to the
investors in a volatile market
ƒ
We are initiating coverage on Fauji Fertilizer Company Ltd (FFC) and Fauji
Fertilizer Bin Qasim Ltd (FFBL). FFC with an estimated 6-year (CY06-12E)
earnings CAGR of 7.1% and trading at CY08E PER of 11.9x provides an
upside of 23.5% to our 12 month target price of PKR 154 per share. FFBL
with an estimated 6-year (CY06-12E) earnings CAGR of 13.8% and trading
at CY08E PER of 10.3x offers 18.9% upside to our 12 month target price
of PKR 55 per share
1,014.2
Daily traded volume - 12mth (mn)
1.4
Current price
124.7
Target price (PKR)
154.0
FFBL
O/S shares (mn)
934
Market Capitalization (USD mn)
712.3
Daily traded volume - 12mth (mn)
11.2
Current price
46.3
Target price (PKR)
55.0
(%)
FFBL
FFC
Index
80
40
0
-40
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Performance
1M
3M
12M
Absolute FFC (%)
8.4
0.5
6.6
Absolute FFBL (%)
4.4
2.1
59.8
Rel (KSE 100) FFC (%)
1.1
(3.7)
(19.8)
Rel (KSE 100) FFBL (%)
(2.8)
(2.1)
33.3
Umar Nauman
umar.nauman@fortunesecurities.com
(+92 21) 5309101-09 Ext. 141
Fortune Securities Limited
Head Office
3rd Floor, Razi Tower, BC-13,
Block No. 9, KDA Scheme No. 5
Clifton, Karachi
Phone: (92 21) 5309101-09
Fax: (92 21) 5309155
u
ƒ
Retail Broking
Room # 104, 1st Floor
Business & Finance Centre
I.I Chundrigar Road, Karachi
Phone: (92 21) 2466946-51
Fax: (92 21) 2437726
Fortune Securities Limited | Equity Research
Fauji Fertilizers
Contents
1
Investment Summary
2
Overview of the Economy
3
Budget FY08 Impact
7
Demand v/s Supply
8
Pricing
9
Comparative Valuation
11
Fauji Fertilizer Company Ltd. (FFC)
13
Investment Proposal
14
Valuation
18
Company Overview
27
Financial Statements
28
Fauji Fertilizer Bin Qasim Ltd. (FFBL)
31
Investment Proposal
32
Valuation
35
Company Overview
40
Financial Statements
41
Fortune Securities Limited | Equity Research
Fauji Fertilizers
Investment Summary
Pakistan is an agricultural country, with agricultural income forming 20.1% of total GDP in FY07. The
agricultural sector provides food, feed and raw materials to various other industries operational in the
country while it employs more than 41% of the country's total labor force and supports almost the
entire rural population which makes up almost 66% of the total country’s population. Agri-earnings
form about 35-40% of the national income and approximately 60% of total export income which is
derived from raw and processed agricultural commodities. Hence, due to its critical position in the
economic setup, any positive or negative alterations in the industry initiates a domino-effect on the
rest of the financial system of the country.
Consequently, the farming industry has received maximum attention and benefits from the
Government in recent years. This has been in the form of credit disbursements to farmers at lower
rates, subsidized prices of fertilizer and high acreage seeds, reduced electricity charges for tubewells and launching of various training and education programs in order to bring about higher quality
output and improved yield.
Pakistan’s economy has depicted tremendous development in recent years averaging close to 7.5%
in the last 4 years, outshining its peers in the Asian region and fast appearing as one of the emerging
economies in the world. This growth has been amply reflected in the fertilizer industry of the country,
with agricultural production increasing by 4% on average in the last 5 years. Urea and DAP offtake
have registered 5 year CAGRs of 6% and 5% respectively while prices of the two commodities have
displayed CAGRs of 6% and 11% during the same period.
We predict Pakistan’s economic growth to sustain its current levels and estimate GDP increase to
register around 6.5% for FY08 over 6% in the medium term. With the country going through such a
strong expansion phase the fertilizer industry is all to set to reap benefits from it.
Currently nine fertilizer producing plants are operating in Pakistan with a total installed capacity of
4.35mntpa. Current shortage in the industry on the back of rising demand, is met through imports.
We expect the consumption of fertilizers to rise by an average of 3-4% per annum, creating room for
the existing manufacturers to take advantage. Supply on the other hand is likely to rise given the
expansionary projects currently in the pipeline. Urea shortage is expected to shrink significantly in
2010 after the 1.3mntpa expansion of Engro becomes operational.
FFC and FFBL with a collective market share of 62% of the total urea demand, have an opportunity
to capitalize on the current market situation through capacity enhancement and expansions. FFBL
holds 31% market share of DAP, which we expect will increase to 35-40% after the completion of
BMR of DAP plant. The two players will benefit from the rising prices of urea and DAP, which we
expect to increase by a 6-year (CY06-12E) CAGR of 5.5% and 6.2% respectively. The demand over
the next 3 years is expected to keep fertilizer prices and consequently manufacturers’ margins firm
before Engro’s expanded capacity becomes available (expected by 2010), reducing the demandsupply gap in the country.
2
Fortune Securities Limited | Equity Research