Tuesday, 8 October 2013

Fauji Fertilizer Bin Qasim Limited Review

Rising DAP Off Take To Propel Earnings:
Fauji Fertilizer Bin Qasim Limited (FFBL)
We highlight Fauji Fertilizer Bin Qasim Limited (FFBL) as a potential candidate for stock price appreciation, driven by earning expansion on the back of 1) Stellar DAP off take during the Rabi se ason, 2) Decline in international Phosacid prices and 3) Increased pre buying of DAP for the Rabi season by dealer (impact to be seen in 3QCY13). However, we flag declining DAP prices in the international market and expected feed gas price increase as major threats towards FFBL’s profitability.

Rabi Season: thrust for DAP off take:
Fauji Fertilizer Bin Qasim Limited (FFBL)
With the onset of the Rabi season, demand for Phosphate based fertilizers in the country is likely to gather pace. FFBL being the only local manufacturer of DAP in the country stands to benefit the most from stellar demand of this commodity in the country. We expect cumulative off take of DAP to remain in the range of 650-750KT during the Rabi Season of FY14. Fauji Fertilizer Bin Qasim Limited (FFBL) is likely to witness a DAP off take of around 500-550KT (up by 26% YoY) during the upcoming Rabi Season, the gap of around 200KT will be filled by imports from private companies.

Strong pre-buying witnessed in Sep’13:
Provisional Fertilizer data indicates that Fauji Fertilizer Bin Qasim Limited (FFBL) has sold close to 100KT of DAP during Sep’13, this marks a massive 2x MoM increment and indicates pre-buying by dealers in anticipation of strong demand during Rabi Season. The company has also slashed DAP prices by PKR120/bag (current DAP prices at PKR3,740/bag) during Sep’13 to entice buyers.

Phosacid Prices: Continued Depression to Amplify Earnings:
Fauji Fertilizer Bin Qasim Limited (FFBL) Phosacid contract for the 3QCY13 settled at USD710/ton, which marks a contraction of 5%QoQ. The international Phosacid price continue to remain depressed and we expect the company to settle its Phosacid contract for the 4QCY13 at around USD680/ton (down by 4% QoQ), this may help enhance earnings however the impact may be neutralized by a reduction in selling price of DAP.

Looming Threats: Weak DAP Prices and Hike in Gas Rates:
International DAP prices were seen at USD373/ton during Sep’13 posting a 33% YoY decline (down by 12% MoM). Locally produced DAP currently sells at a premium of 12% compared to its imported counterpart. Likely gas price rationalization (assuming equating feed-gas price with that of fuel-gas) by Dec’13 may put Fauji Fertilizer Bin Qasim Limited (FFBL) under strain due to limited pricing power (we expect an EPS impact of PKR1.04 for CY14 if the gas price rationalization materializes)

Investment Perspective:
We recommend a strong BUY stance on Fauji Fertilizer Bin Qasim Limited (FFBL) as the stock offers an enticing 28% upside to our June’14 target price of PKR51/share. The script also presents an attractive yield of 14% while trading at a forward PER of 5.5x. It is pertinent to note that FFBL usually earns 30-35% of its full year earnings in the fourth quarter (mainly on the back of higher DAP off take).

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