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%.

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.

FFBL Investment in WPP a diversification in right direction

FFBL Investment in WPP a diversification in right direction



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 2HFY11 and plants to come online in 2H13. Project cost is Rs11bn each and debt:equity ratio would be 75:25.. We expect cash payout for CY11 could fall to 80% keeping in view the financing share from FFBL in the project.


Valuation:


The stock is currently trading at CY11E P/E 6.32x and offers dividend yield of 15.64% along with capital gain of 7.7%, our TP for the stock is Rs47.54/ share.

FFBL’s superb earnings adding more value

FFBL’s superb earnings adding more value


FFBL’s cumulative dividend of Rs4.75/ share will have an EPS impact of 2.40/ share in 1H11 earnings of FFC. Improved margins on DAP resulted in bumper earnings of FFBL, hence adding value to FFC’s bottom line. We expect other income to improve by (+79% YoY) to Rs2,730 mn in 1H11 as against Rs1,525 mn in 1H10. Company’s other charges and distribution expenses are likely to swell by +38% YoY and +15% YoY respectively.