Fauji Fertilizer Bin Qasim Ltd. (FFBL) Thriving on DAP margins

Fauji Fertilizer Bin Qasim Ltd. (FFBL) Thriving on DAP margins

FFBL is scheduled to announce its 9M11 result on October 25, 2011. We expect the company to post PAT of Rs6,962mn (EPS: 7.45) versus PAT of Rs2,931 mn (EPS: 3.14) in corresponding period last year, massive upsurge of (+137% YoY). Company’s profitability in 3Q11 likely to improve by (+74% QoQ) translating into PAT of Rs3,428mn (EPS: 3.67) versus PAT of Rs1,975 mn (EPS: 2.12) in 2Q11. Moreover we expect company to announce cash dividend of Rs3.25/ share in addition to already paid interim cash dividend of Rs3.50/ share.

Uptick in DAP margins to improve net margins

Since commencement of CY11 industry faced gas curtailment and seizure on Sui network. Considering the sensitivity FFBL focused to produce more of DAP which requires more of Phosacid compared to Urea which is completely dependent on ammonia production. Company capitalized on the rising DAP prices and primary hovering over US$ 300/ton.

DAP prices averaged at Rs3,309/ bag (ex factory) up by 30% YoY during 9M11 where as primary margins averaged at US$ ~315/ ton, up by (+28.5% YoY) during the period under review. Moreover urea margins improved too due to constant rise in urea bag prices. However production suffered owing to gas curtailment thus ammonia consumption prioritized towards DAP production and residual for Urea production. Consequently we expect gross margins to clock in at 37.80% versus 30.10% in 9M10.

Earnings marathon still on

3Q11 likely to prove best quarter for CY11 where we expect (EPS: 3.67) up by (+74% QoQ) on back of improved DAP offtake of 217k tons up by (+113% QoQ) however urea offtake to remain depressed at 119k tons, (-19% QoQ). Topline to improve by +78.7% and gross margins to clock in at 38%, slightly down by 200pps QoQ due to decline in primary margins to US$ 286/ ton during the quarter down from US$315/ ton in 2Q11.

CY11 earnings to be all time high

Recent According to our estimates CY11 earnings to be all time high and company‘s profitability to swell to Rs10,293 mn (EPS: 11.02), up by 58% YoY where as 4Q11 earnings to be (EPS: 3.28). We believe DAP prices to remain firm for the 4Q11 because Phosacid 4Q11 prices settled at US$1080/ ton, up by 3% QoQ and there is very gradual decline witnessed in international DAP prices.

Whats next for investors?

There are concerns in the market about earnings decline post CY11 onwards, we believe DAP prices to start easing from 1Q12, however we primary margins would still average at ~ US$252/ ton for the CY12 versus US$ 302/ ton for CY11. We expect ex factory DAP prices to dip by ~10% for CY12, but we believe company can compensate the margins loss through higher capacity utilization as DAP demand for CY12 is expected to increase to 1.3mn tons. On the other hand gas curtailment to continue during winter season and would force the fertilizer manufactures to further scale up the urea prices. We believe urea prices would not decline unless uninterrupted gas supply is ensured to the Sui network players.

Investment in WPP, a diversification in right direction

FFBL is investing in wind power project with 50mw of 2 projects and FFBL’s share is 35% in each project. Financial close is expected in 4Q11 and plants to come online in 2H13. Project cost is Rs11bn each and debt/equity ratio would be 75/25. Going forward from CY14 onwards dividend payout from power project to augment the other income portion along with hefty other income contribution from short term investments and PMP profits.

Recommendation:

The stock has rallied from Rs42.20 (July01’11) to Rs62.22 (todate), a gain of (+47.4%). The stock rallied on back higher earnings anticipation and it was trading at P/E of 3.84x in July. We still recommend Buy for stock and currently trading at CY11/CY12 P/E of 5.65x/6.43x and CY11/12 dividend yield of 16.63%/14.61%. Our June-12 TP of Rs73/ offers upside potential of 17.36%.

Bullion touched US$1669 an ounce yesterday before closing, with a drop of 3.54%, at US$1594 an

Bullion touched US$1669 an ounce yesterday before closing, with a drop of 3.54%, at US$1594 an
ounce. It reached US$1669 an ounce as Euro debt resolution became more and more doubtful.
Investors also took advantage of low prices indulging in short selling, which resulted in fluctuating
price levels.
The main demand for the metal that is causing its prices to increase is from India and China who
have always been the largest and second largest consumers of gold. Moreover, the peak season for
gold has already started in September with Eid and will continue in October and onwards owing to
Diwali and weddings which will further boost the metal’s consumption.
However, global recession threat including expected deceleration in China’s growth, falling demand of
US consumer goods etc is causing all commodities to fall, and is also spilling its effects on gold. Plus the
strengthening of dollar has also resulted in the precious metal losing its appeal as an investment
haven.
The metal has touched US$1583 an ounce today breaking the support level of US$1588 an ounce. Thus
it is possible that it dips to US$1533 an ounce once again. This period is for investors to perform short
selling; buying at around US$1587‐US$1600 and selling as it reaches US$1644‐US$1650 an ounce.
Using Fibonacci Retracements we have estimated the following resistance levels for gold:
R1=US$1651; R2=US$1714; R3=US$1793
Analyst:
Ms. Gulshan D
Ferozepurwalla*
gulshan@scstrade.com
+92‐21‐111 111 721
September 29, 2011
Pakistan Research
Commodities Daily
MARKET WATCH
(Prices as on September 28,
2011)
Open

The fertiliser sector has been facing serious problems as a result of gas curtailments by the Sui network. It has substantially affected production, s

The fertiliser sector has been facing serious problems as a result of gas curtailments by
the Sui network. It has substantially affected production, subsequently affecting urea
sales for the 8MCY11, resulting in a fall of 3.9% as against the same period last year,
from 3.86mn tons to 3.7mn tons of urea dispatches.
Though if only the last month of August is reviewed then one would see an increase of
84.5% to 556,000 tons of Urea sales compared to 302,000 tons in August 2010. This
increase has mainly been contributed by the single train fertilizer Engro Enven, which
boosted operations by 35% to 150,000 tons on a monthly basis, and the lower
comparative production figure in the same period last year on account of devastating
floods.
However, DAP did not meet the same fate as Urea. Infact the Di‐ammonium phosphate
fertilizer witnessed an increase of 24.3% in 8MCY11 period, rising to 521,000 tons as
compared to 419,000 tons in same period last year. The reason behind the increase in
DAP sales is the shortage of Urea production and expectation of rise in DAP prices.
Thus the highlight of today’s news is the climb in DAP sales which is a positive news
for Fauji Fertilizer Bin Qasim (FFBL) as it is the sole producer of DAP in Pakistan and
hence would enjoy the largest chunk of revenue.
Moreover, as the Rabi season is nearing the DAP sales are further mounting, with
77,000 tons DAP dispatches in August 2011 alone, which is 52.9% higher than the
50,000 tons in August 2010. Thus FFBL would capitulate most of the benefits which
would be further combined with the increase in Urea production and sales on
account of gas resumption.
Thus we expect FFBL to yield an EPS of Rs9.06/sh and potential PE of 6.35x with a
DCF fair value of Rs68.2/sh.
FFBL has already shell out first and second interim dividends and is expected to give
third and fourth interim dividends which would bring the amount of total dividend to
around Rs10/sh.
We reiterate “BUY” for FFBL which has an appreciation margin of 18.6% from its
current market price of Rs57/sh.

GOLD TRENDS 29-9-2011 Gold touched US$1533 an ounce yesterday and closed at US$1630 an ounce with a ‐0.77% change.

Gold touched US$1533 an ounce yesterday and closed at US$1630 an ounce with a ‐0.77%
change.
It touched US$1663 an ounce as investors realized that the Greece debt crisis is not going to
be solved anytime soon; in fact speculators consider it to be on the brink of a default.
However, investors are in a frenzy witnessing the augmenting dollar against the Euro, which
is reducing gold’s demand as an alternative investment to dollar and therefore want to
realize as much cash as possible by selling bullion and move towards Treasuries.
We expect gold to dwindle in short term on account of dubious investors, which may cause
the metal to touch the US$1533 low once again. However, it appears that the uncertainty of
Euro zone debt resolution is bringing investors a bit closer to gold which is maintaining its
prices above the support level of US$1583 an ounce for now. The support level of US$1648 is
very weak and the metal appears to break this level time and again in daily trading.
Furthermore, gold is expected to fall in the short term if any news related to the efforts to
resolve the Greece debt issue, surfaces.

CEMENT TREND - FFC IS THE BEST AFTER LUCKY

The rising prices of raw materials such as coal, diesel, electricity etc have grabbed the
cement companies by the throat, who are trying to develop new means of production
to cut as much as cost of production as they can. However in this time of augmenting
inflation good news has surfaced, for the cement companies i.e. Rs30 per kg bag
increase in the selling prices of cement in the northern zone. This constitutes a 7.8%
rise in prices in just one month. Newspapers are reporting retail price of Rs 415/50kg
bag.
This increase in price would benefit the northern players including major players such
as DG Khan Cement (DGKC) and Fauji Cement (FCCL). We cover both the companies.
The revenue base would witness a jump which would also compensate for any decline
in local sales or exports in the situation of a supply glut. Particularly, we expect Fauji
Cement to gain high profits on the back of increasing prices. Moreover, a discussion
with the FCCL management highlighted that FCCL’s production has increased
manifolds along with sales booming substantially in recent times. Moreover, the new
German line is fully operational thus making FCCL making one of the better players in
the industry.
We expect FCCL to yield FY12EPS in the range of Re 0.7/sh with a DCF target price of
Rs8/sh ‐ Rs9/sh.
P&L a/c Rs '000 FY09 FY10 FY11
Sales 6,953,323 4,902,396 5,788,302
Gov. levy (1,638,785) (1,093,941) (1,045,709)
Net sales 5,314,538 3,808,455 4,742,593
COS (3,627,110) (3,292,871) (3,919,540)
GP 1,687,428 5 15,584 823,053
Distribution cost (50,260) (47,737) (74,149)
Administrative expenses (103,186) (103,490) (147,938)
PBIT 1,533,982 3 64,357 600,966
Other income 1 90,424 27,220 28,053
Other operating expenses (78,173) (25,460) (36,944)
Finance cost (224,716) (41,206) (103,922)
PBT 1,421,517 3 24,911 488,153
Taxation (413,894) (74,732) (62,492)
PAT 1,007,623 2 50,179 425,661
EPS 1.43 0.31 0.52
Margins and ratios FY09 FY10 FY11 FYE12
EBIT margin 28.9% 9.6% 12.7% 14.7%
PBT margin 26.7% 8.5% 10.3% 12.5%
PAT margin 19.0% 6.6% 9.0% 9.6%
cost/sales 68.2% 86.5% 82.6% 81.9%
Source: Standard Capital Research
We continue to maintain “BUY” for FCCL and now consider it our top pick in
cement sector after Lucky Cement (LUCK).

Pakistan Petroleum Ltd (PPL)

Pakistan Petroleum Ltd (PPL) reported consistent cuts in its dividend payouts as
witnessed by market since FY08. The company had announced a dividend payout of
Rs12/sh in FY11 as against a payout of Rs9/sh and Rs13/sh in FY10 and FY09 respectively.
Years FY11 FY10 FY9 FY8 FY7 FY6 FY5
Div. % 120 90 130 155 110 90 55
Bonus % 10 20 20 10 10 ‐ ‐
Source: www.scstrade.com
Due to the concerns of circular debt coupled with the consistent flat growth observed in
Oil and Gas Sector, analysts did not expected much from PPL. The recent news updates
delineated apparent management’s intentions to discontinue dividend cuts. Thus
management is trying not to deprive its shareholders from dividend especially when
Government of Pakistan is the major shareholder and beneficiary.
PPL despite of undertaking large‐scale exploration and production activities together
with the strategic shift of focus to drilling its own oil and gas wells instead of relying on
joint venture partners to shore up the company’s depleting reserves; it is yet seems to
have its financial and liquidity position in a comfortable zone. This financial stability could
be a good omen and a trigger for the attractive cash payouts along with the customary
bonus of 10% ‐ 20%.
The biggest trigger in PPL is any news which is related to privatization since company
needs injection of investment in technology and latest equipments which could only be
possible if some able foreign partner take a direct control of the company. PPL, for many
years, is having flat gas production and its proportion of oil production is minimal in
overall ‘production mix’. At present the PPL has got weak triggers. The main trigger for
PPL is ‘price increase’ announced by the regulator OGRA on PPL’s depleting assets.
Rumors on Qadirpur subsided
We have had a discussion with many people in the company (OGDC) wherein we could
not find any thing negative happening at big gas producing field Qadirpur since it is
a perforated land in Sindh province and cannot be in any way equated with Pindori like
water log problem at Khyber Pakhtoonkhwa.
In fact a new compression plant installed is at the testing stage. The gas field reported
satisfactory sale of 501mmcfd till 6' o clock morning yesterday (which is last sale
reporting time). Any good result in testing would result in addition to gas production.
We consider this to be good news for OGDC (major stakeholder) and PPL (minor
holdings).

KSE TREND 26-9-2011

Markets ended lower on the last trading day of the week as turmoil in the international markets was reflected in KSE. Net outflow of $1.936 million was witnessed in the equities on Friday.



Further, increasing tensions with America on the issue of Haqqani network is a source of concern for investors, however, the army called an extraordinary corps commander meeting on Sunday where a source privy to discussions at the conference revealed that de-escalation efforts were afoot.



The government has lowered the GDP growth target for FY12 from 4.2% to 3.5% following an estimated loss of 2.5 million cotton bales in Sindh by recent floods