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Please Refer to last page for important disclosures and analyst certifications

Foundation Research|

Equities REK-192 

25 Jan 2015

FFBL PA Neutral

Stock price as of 22 Jan Rs 47.9 

Jun 16 target Rs 45.2 

Upside/downside % (5.6) 

Valuation Rs 45.2 

- SOTP

Fertilizer

Market cap Rs bn 44.7 

30-day avg turnover US$m   0.4 

Market cap US$m 443 Number shares on issue m 934 

Investment fundamentalsYear end 30 Dec 2014A 2015E 2016E 2017E

Tota l revenue mn 4 9,4 45  55,079  55,519  57,467 

EBIT mn 7,093  6,472  5,675  6,990 

EBIT Growth % (28.18)  (8.76)  (12.31)  23.17 

Recurr ing P rofi t m 4 ,0 16  3,295  3,460  5,261 

Report ed Profit m 4 ,01 6  3,295  3,460  5,261 

EPS rep Rs 4.3  3.5  3.7  5.6 

EPS rep growth % (28.4)  (18.0)  5.0  52.0 EPS rec Rs 4.3  3.5  3.7  5.6 

EPS rec growth % (28.4)  (18.0)  5.0  52.0 

PE rep x 11.6  14.1  13.4  8.8 

PE rec x 11.6  14.1  13.4  8.8 

Total DPS Rs 3.5  3.3  3.3  5.5 

Total div yield % 7.0  6.5  6.5  11.1 

ROA % 9.7  8.0  9.4  14.1 

ROE % 31.0  24.7  26.2  39.8 

EV/EBITDA x 8.2  8.6  10.4  8.6 

Net de bt /e quit y % 1 44 .6  98.9  116.7  128.8 

Price/book x 3.6  3.4  3.6  3.4 

FFBL PA rel KSE 100 performance

Source: Blo omberg, Foundation Research, Jan 2016

(all figures in Rs unless noted)

AnalystMuhammad Awais Ashraf m.awais@fs.com.pk

92 21 5612290 Ext 339

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FFBL KSE100

 

Fauji Fertilizer Bin Qasim 

Phosphate subsidy – a savior Event

  Timely disbursement of phosphate subsidy accompanied with better gas availability

has partially offset the drag of higher phosphoric acid (main raw material of DAP) and

gas prices on company’s profitability. We foresee the DAP sales in the coming year

would remain contingent upon disbursement of DAP subsidy given poor farmer

economics. However, crude oil below US$75/bbl would make the RLNG pricing feasible

for the company’s operations. Recent share price plunge makes us change our stance

from “Underperform” to “Neutral”.

Impact

  Higher raw material cost to trim profitability: Despite higher DAP and Urea sales, we

expect profitability to trim (18% YoY). This is primarily attributed to lower DAP margins

(down 17% YoY) and higher gas prices (6% YoY feed stock & 10% YoY fuel stock). Timely

disbursement of phosphate subsidy has helped the company to post 5% YoY growth in

it’s flagship DAP segment despite tight cash position of farmers. To recall, government

has announced Rs20bn subsidy on phosphate products. While strong brand name amid

better gas availability (up 22% YoY) has helped to maintain its ground in urea segment. 

  Balance sheet leveraging, to meet the thrust of expansion, has further dented

profitability through higher financial charges (up 36% YoY).

  LNG may bring into service underutilized levels: Being on SSGC’s network amid

plunge in oil prices make a strong case of LNG usage for fertilizer’s manufacturing

(contracted at 13.37% of crude oil). At current fertilizer prices, running on RLNG would

be feasible if crude lies below US$75/bbl and US$50/bbl for DAP and Urea respectively.

At present, the company is running at utilization levels of 119% and 55% for DAP and

Urea respectively.

  Domestic agronomics to define course of prices: We foresee fertilizer prices to

remain subdued given farmer’s tight cash position amid depressed agriculture outlook.

Our view is premised on high inventory levels of rice, maize and sugarcane, and

subdued cotton demand amid slow down in China and EU. In the long run, declining

international fertilizer prices, both DAP (down ~2% YTD) and Urea (down ~35% YTD), on

the back of lower prices of agriculture commodities and reducing production cost would

further constrain local manufactures pricing power.

Earnings Revision

  We revise our CY15/16 estimates by -0.4%/-10.5%, on the back of probable gas price

hike and trimmed fertilizer prices. Subsequently, we cut our June-16 TP to Rs45.2/sh.

Price Catalyst

  Jun-16 price target: Rs45.2/sh based on SOTP methodology.

 Catalyst: 1) Dividend income from FWE-I&II, 2) positive results of FML and NOPK and3) commencement of FPCL (118MW coal based power plant). 

Action and Recommendation

 Foreseeing cash constrained position of farmers amid probable gas price hike and

subdued DAP margins make us cautious towards the scrip. Sustainability of DAP sales in

CY16 would be contingent upon budgetary allocation of phosphate subsidy.

PAKISTAN

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Fauji Fertilizer Company Limited January 25, 2016

2  Foundation Securities (Pvt) Limited

  About the company 

Fauji Fertilizer Bin Qasim is the sole DAP and Granular urea producer in Pakistan. Initially named as FFC-Jordan Fertilizer

Company (FJFC), FFBL was formed on 17th Nov 1993, with FFC (30%), FF (10%) and JPMC (10%) as main sponsors. The

company was formally listed with stock exchanges in May 1996 and commercial production commenced wef Jan 2000. The

company was renamed as Fauji Fertilizer Bin Qasim Ltd. (FFBL) in 2003, as Jordan Phosphate Mines Co. (JPMC) had sold itsentire equity in the company. FFC currently owns a 49.9% stake in FFBL. FFBL is listed on all the three stock exchanges of the

country.

Disclaimer:   This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based uponinformation obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty,representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject tochange without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein arenot intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities orother financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysisbefore such material is disseminated to its customers. Not all customers will receive the material at the same time. FSL, their respective directors, officers,representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuersdescribed herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financialinstruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financialinstruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may haverecently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

Research Dissemination Policy: Foundation Securities (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligibleclients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive thematerial at the same time.

Target price risk disclosures:  Any inability to compete successfully in their markets may harm the business. This could be a result of many factorswhich may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materiallyaffected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes ininterest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivativeinstruments, to manage certain of these exposures.

 Analyst certi fication: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuersand no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in thisresearch. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of FoundationSecurities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Recommendations definitionsIfExpected return >+10% Outperform.Expected return from -10% to +10% Neutral.

Expected return