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.