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Monday, October 15th, 2018

AKD Quotidian about — FFC: Compelling returns

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Karachi, May 08, 2013 (PPI-OT): FFC posted NPAT of PkR4,glOmn (EPS: PkR3.86) in IQCYIS inline with expectations where AKD Securities maintains CYI3F earnings estimate.

According to AKD Securities continues to prefer FEC within the fertilizer sector led by low risk business dynamics, leading to compelling returns for the year. In this regard, with expected stability in urea prices and lower urea imports during the year, AKD Securities expects urea off take of the company to sustain at C’Y12 level of -2.4mn tons, translating into CY13 NPAT of PkR2Q483mn (EPS: PkRlS.1O) along with a payout of PkRI6/share, implying a fl/V of 14.2%. That said, with stable production during the year, EEC is positioned to gain additional market share due to anticipated lower availability of imported urea, where every O.lmn tons of additional urea sales translates into positive EPS impact of 1.2% for CY13. Moreover, AKD Securities reiterates a very moderate risk of a clip in payout for the year, where AKD Securities downplays liquidity concerns arising out of a PkRB.Sbn outflow for the AKBL transaction. At current levels, FFC provides upside of 27% to AKD Securities targets price of PkRl4lIshare. Buy!

Strong start to the year: FFC posted NPAT of PkR4,9lOmn (EPS: PkR3.86) in 1OCY1 3, a growth of 27%YoY led by a 72%YoY increase in urea off take. While the substantial increase in off take largely came on the back of abnormally low off take during 1QCY12, AKD Securities expects higher crop prices (wheat and cotton in particular) to maintain urea demand during the rest of the year. In this regard, while AKD Securities bases case urea off take stands dose to CY12 levels of -2.4mn tons, AKD Securities highlight likely lower availability of imported urea during the year to improve FFC’s market share albeit marginally, where every 0_i mn tons of additional urea sales translates into positive EPS impact of 1.2%. Moreover, AKD Securities cases is further strengthened by provisional Apr’13 off take numbers implying a 15%MoM increase in off take for FFC amidst an industry-wide decline during the month.

Muted payout risk: FEC maintained a high payout ratio in 1QCY13 (DPS: PkR3.5) amid concerns of a dividend clip due to an impending cash outflow for the AKBL transaction in 2QCY13. In this regard, the transaction will cost FEC PkR8.53bn, where a debt component of 80% implies a negative annualized finance cost impact of PkRO.44/share. However, on a net basis, where AKD Securities assumes AKBL share of profits to contribute PkRO.51/share (on AKBL CY1 3F NPAT of -PkR1 .5bn), the transaction is expected to result in a net positive EPS impact for FFG of PkRO.07/share. Moreover, the company’s liquid assets as per latest accounts stand at a comfortable PkRl4bn.

Outlook and Investment Perspective: While CY12 remained overwrought by an onslaught of imported urea, resulting in suppressed market shares of local manufacturers; AKD Securities expects better fiscal discipline in the face of an imminent entry into an ME program to result in lower imports during the year (fertilizer imports in CY12 cost GoP an estimated -PkR6Obn excluding subsidies). Moreover, AKD Securities believes robust 1 QCY1 3 fertilizer demand led by higher crop prices (local cotton and wheat prices higher by an average 16%Y0Y) have set the tone for continued growth in off take, where AKD Securities expects 2HFY1 3 NPAT for FFC to increase by 11 %YoY.

FFC remains AKD Securities preferred play in the fertilizer sector along with ENGRO where FFC’s consistently strong performance, as highlighted by total returns (including dividend) over the last 10 years of 38%, makes it a compelling investment. At current levels, FFC trades at a CY13F PIE of 6.Qx and provides an upside of 27% to AKD Securities TP of PkR141/share along with a DIY of 14.2%.


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