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AKD Quotidian about: FATIMA: Payout concerns may overshadow earnings growth

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by March 14, 2013 Brokerage

Karachi, March 14, 2013 (PPI-OTFATIMA posted NPAT of PkR6,lllmn (EPS: PkR2.86) in CY12, a sizable growth of 48%YoY led by 2xYoY revenue growth despite margin compression due to higher gas prices.

According to AKD Securities however, investor interest in the scrip remained dull as profitability fell short of expectations due to lower margins in 4QCY12, as is evident by share price underperformance and low trading volumes during CY12. The management has revealed its plans to invest US$l5Omn to acquire a 31% stake in Midwest Fertilizer USA over the next three years. In this regard, while the project will likely be a lucrative venture given historically low natural gas prices in USA, AKD Securities highlights that the substantial investment will likely clip dividend payout going forward. At current level, FATIMA trades at a CYI3F PER of 5.3x and provides an upside of 53% to AKD Securities revised target price of PkR37/share.

Strong earnings growth: With a 5-year earnings CAGR of 13% led by

subsidized feedstock gas rates and expected growth in market share of its diversified product mix, FATIMA remains undervalued, in AKD Securities views. In this regard, AKD Securities expects CY13F NPAT to record a sizable growth of 58%YoY led by 18%YoY higher revenues, gross margin expansion of 5pptYoY to 64% and a 24%YoY reduction in financial charges due to replacement of expensive loans in CY12. In the longer term, AKD Securities believes the company’s plan to enhance ammonia capacity by 300 tons/day will lead to increased production, where AKD Securities has incorporated conservative utilization levels of 90% for Urea and CAN, and 80% for NP from CY1 5F onwards.

Investment in Indiana to clip payout The management has revealed its

plans to invest US$l5Omn to acquire a 31% stake in Midwest Fertilizer USA over the next three years. In this regard, FATIMA is participating in a global consortium to set up a 1.5mn tons nitrogen fertilizer plant in Indiana, where the Indiana Finance Authority had earlier issued US$1 .26bn worth of tax-free notes for the initial phase of the facility. However, conversion of the notes to bonds Es subject to approval by the authorities, which are persuading FATIMA to work actively on the chemical composition of CAN and reduce its explosiveness. In terms of economics of the venture, AKD Securities believes a 60% drop in US natural gas prices since reaching a high in 2008 makes it a highly profitable venture. However, AKD Securities highlight s that the substantial investment by FATIMA (PkR4.9bn annually for the next three years) is likely to clip dividend payout going forward.

Investment Perspective: With a positive outlook far fertilizer demand in CY1 3,

AKD Securities expects earnings growth to drive investor interest in FATIMA going forward. That said, AKD Securities believes the company’s plans to expand its geographical footprint in USA will likely impact dividend payout negatively, while the fertilizer sector’s primary charm lies in its historically high dividend yield. Moreover, key near term risk to earnings arises from a possible decline in urea piles as a result of potential resumption of gas supply to ENGRO at US$O7lmmbtu, where a PkR300/bag decline in price will have a negative EPS impact of PkR1 .23 for FATIMA. At current level, FATIMA trades at a CY1 3F PER of 5.3x and provides an upside of 53% to AKD Securities revised Dec-13 target price of PkR37/share.

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