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KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While  all  reasonable  care has been  taken  to  ensure  that  the  information  contained  therein is not untrue or misleading  at  the  time of publication, we make no  representation  as  to  its  accuracy or completeness and  it should not be relied upon as such. From time to time KASB Securities Ltd. and any of  its officers or directors may, to the extent permitted by  law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their owninvestment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or  indirect consequential  loss arising from any use of this report or  its contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors.  KASB, as a full‐service firm, has or may have business relationships, including investment‐banking relationships, with the companies in this report. 

Morning Shout Aijaz Siddique Aijaz.siddque@kasbsec.com KASB Securities Limited +92 21 111 222 000

Industry Overview Fertilizer | Pakistan April 28, 2016

Pakistan Fertilizer

REP-039 www.jamapunji.pk

   

Reversal in gas tariffs may bring players on an equal footing

Govt. may resort to reduction in feed tariffs to remove inventory glut As per our channel checks, the government is considering a proposal for reduction in the gas tariffs in lieu of commitment from manufacturers for a reduction in urea prices. We believe reversal of gas tariffs to pre-Sep-15 levels and decline in urea prices present an optimal solution as (1) it would reduce inventory levels, obviating the need for any exports (which would reduce margins drastically), and (2) it would provide a respite to the farmers and have the same impact as a subsidy on urea and DAP fertilizers. Cutting fuel rates alone would not be effective as consumption is ~5mmbtu/ton only. Following reversal in tariffs, quantum of the final reduction in urea prices will dictate the impact on the earnings of the firms. We have assumed objective will be to maximize the reduction in urea prices to resolve inventory backlog. We have discussed below how a reversal in just feed tariffs and reduction in urea prices would affect the earnings of FFC, FFBL, Efert and Fatima. Furthermore, we have provided a sensitivity analysis (refer Table 2) of reversal in both feed and fuel tariffs and decline in prices by PRs150/bag.

Reversal in feed tariffs would benefit FFBL and FFC The performance of the fertilizer sector continues to be hit by double whammy of (1) higher inventory amid recovery in production and (2) low farmer demand due to increase in cost of inputs and lower commodity prices. It is highly probable that the govt. would reduce just feed tariffs back to PRs123/mmbtu. In that case, it can negotiate a price decline of PRs85/bag (PRs102/bag including GST) which will neutralize the margin impact on FFC. However, it will negatively affect the bottom-line of Efert and FATIMA as they receive concessionary gas for their new plants. We have analyzed the impact of such an action:

FFC: Our base case EPS of PRs9.60/sh assumes off-take of 2.348mn tons in CY at average prices of PRs1820. If FFC decides to completely pass-on the impact of reduced tariff via PRs102/bag urea price cut for remaining 8-mths, we see upside in earnings due to potentially improved sales.

FFBL: We believe reversal in feed tariffs might eventually affect the amount of subsidy offered on phosphate based fertilizers. However, assuming FFBL keeps DAP prices unchanged after the feed gas tariff is reduced, earnings increase to PRs3.74 due to the higher margins on DAP.

EFERT: As we have incorporated just Enven, which runs on concessionary gas, any reduction in feed tariffs would not contribute to the EPS. However, if Efert decides to match FFC prices, earnings will be impacted significantly. In such a scenario we estimate earnings to decline by ~9% from our base case of PRs10.23. If we incorporate both plants, reversal in feed tariffs and reduction in prices would have a positive impact on the profitability due to increase in volumes.

Fatima: We believe Fatima would be most affected in such a scenario. A reduction in urea and CAN prices by PRs100/bag, would negatively affect our base case estimates. We expect earnings to decline to PRs3.82/sh compared to our base case of PRs4.11 for CY16E.

Inventory levels remained high in Apr-16 Total urea inventory crossed 1.2mn tons at the end of Mar-16. However, that does not include the inventory held by dealers. As we had already flagged in our report on 29’Mar-16, higher production by Agritech Limited (AGL), DHFL and FFBL due to increased availability of gas would lead to significant back-log due to low demand this year. Our channel checks suggest that the inventory levels have continued to remain very high in Apr-16 as well.

Scenario 1: Reversal in Feed

CY16E Base Sce1* %

FFC 9.60 9.60 0.00%

FFBL 3.40 3.74 10.00%

Efert 10.23 9.30 -9.09%

FATIMA 4.11 3.82 -7.06% Source: KASB Research Sce1* Reduction in prices of PRs100/bag  

Scenario 2: Reversal in feed and fuel tariffs CY16E Base Sce2* %

FFC 9.60 9.60 0.00%

FFBL 3.40 4.07 19.71%

Efert 10.23 9.15 -10.56%

FATIMA 4.11 3.85 -6.33% Source: KASB Research Sce2*: Reduction in prices of PRs150/bag

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Pakistan Fertilizer – April 28, 2016

Index Data & Volume Leaders

Close % Chg

Vol. US$ mn

KSE30 19,854.51 1.5% 69.96 KSE100 34,269.28 1.2% 101.89 KSE All Share 23,643.70 1.4% 119.32 ENGRO 312.77 1.8% 13.02 SNGP 33.55 0.8% 8.63 OGDC 126.81 4.9% 7.35 ATRL 260.35 2.9% 7.12 POL 314.52 4.0% 5.06

KSE-100 Intra-day Movement FIPI

33,910

33,975

34,040

34,105

34,170

34,235

34,300

9:30 AM 10:53 AM 12:14 PM 1:35 PM 2:56 PM

High 34,305

Low 33,914

KSE-100: Top Gainers & Losers FIPI

-4% -2% 0% 2% 4% 6%

CPPL

BNWM

ASRL

IGIIL

NESTLE

NML

NCL

FML

EFUL

PAKT

Source: KASB Research

Morning News

Govt. to spend PRs1.5tn on development, eyes 6.5% GDP growth in FY17 (DAWN): On Wednesday, the federal cabinet has approved Budget Strategy Paper (BSP) for the next fiscal year with target to spend PRs1.5tn on development, reduce fiscal deficit to 4% of gross domestic product (GDP), increase economic growth rate to 6.5% and limit inflation to 6%. Finance Minister, Mr Ishaq Dar acknowledged before the cabinet that the GDP growth rate will miss this year’s target of 5.5% mainly due to a setback to the cotton crop and projected the growth rate to be 5% in FY16. He further added that the growth rate is expected to reach 6.5% by the end of next year driven by (1) capacity additions in gas and power sector, (2) additional investments under the China-Pakistan Economic Corridor (CPEC), and (3) improved security environment.

All bids for T-bills rejected (Dawn, Analyst Comment): The government rejected all bids in the recently held T-bill auction. The central bank has set a pre-acution target of PRs225bn. Looking at the bid pattern, we believe the decision was made due to high bid rates by banks, where bids started from near the levels of previous auction cut-off rates (6.16%/6.18%/6.20% for 3M/6M/12M). In addition, this reflects the central bank’s signal of no change in monetary policy stance in our view.

Pakistan’s B3 rating reflects strengthening growth: Moody’s (DAWN): Commenting on Pakistan’s B3 rating on Wednesday, Moody’s investors service stated that the B3 issuer rating indicates the sign of strengthening economic growth and progress on structural reforms against a relatively high government debt burden and political risks. The agency further stated that the economic output has picked up over recent years and is now rising at a relatively healthy pace. Moreover, the implementation of the China-Pakistan Economic Corridor and energy sector reforms will likely boost the economy and improve the operating environment for investment.

PTA to auction 3G/4G license for US$395m (Tribune): In an apparent bid to overcome the revenue shortfall, the government has tasked the Pakistan Telecommunication Authority (PTA) with the auctioning a 3G/4G mobile broadband licence at a base price of US$395mn before the end of current fiscal year on June 30. Recall the auctions held in Apr-14 where a combined US$1.1bn was raised, the base price for a 3G license was US$295mn and for a 4G licence was US$210mn.

Technical View

Kamal AhmedKamal.ahmed@kasbsec.com 

KSE-100: Index is trading at a major resistance area

The index opened positive and remained positive in the entire last trading session, closing in the green.

While the index is facing a trend line resistance at 34,500-34,700, it appears that the index could hold this resistance and could give a corrective move.

A closing above 34,500-34,600 could guide the index further towards 35,000.

However, a closing below 33,400 (200-DMA) would change our stance from bullish to neutral.

It is recommended to exit trading positions on strength.

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Pakistan Fertilizer – April 28, 2016

International Equity Markets

Asian Markets (Last trading session’s)       European Markets (Last Trading Session’s Rates) Price Abs. Chg. % Chg. Price Abs. Chg. % Chg. All Ordinaries 5,250.95 -32.7 -0.62 ATX 2,329.96 17.0 0.7 Shanghai Composite 2,953.67 -11.0 -0.37 BEL-20 3,479.58 8.4 0.2 Hang Seng 21,361.60 -45.7 -0.21 CAC 40 4,559.40 26.2 0.6 BSE 30 26,064.12 56.8 0.22 DAX 10,299.83 40.2 0.4 Jakarta Composite 4,845.66 31.6 0.66 AEX General 448.37 0.7 0.2 KLSE Composite 1,692.34 -0.2 -0.01 Swiss Market 8,096.76 19.6 0.2 Nikkei 225 17,290.49 -62.8 -0.36 FTSE 100 6,319.91 35.4 0.6 NZSE 50 6,750.41 -45.3 -0.67 American Markets Straits Times 2,874.72 -19.9 -0.69 Dow Jones Ind. Average 18,041.55 51.2 0.3 Seoul Composite 2,015.40 -4.2 -0.21 NASDAQ Composite 4,863.14 -25.1 -0.5 Taiwan Weighted 8,563.05 -18.5 -0.22 NASDAQ -100 4,416.64 -36.3 -0.8 KSE-100 Index 34,269.28 421.5 1.25 S&P 500 Index, RTH 2,095.15 3.5 0.2

Source: Bloomberg                  *Closing 24th March                                                               

Foreign Portfolio Investment in Equities Country Day (US$mn) WTD (US$mn) MTD (US$mn) YTD (US$mn) 12M (US$mn) Date

Pakistan -3.4 -8.2 -13.9 -114.6 -325.4 27-4 India 85.7 121.7 485.8 1,699.6 -2,832.3 26-4 Indonesia -27.7 -80.4 89.4 404.8 -2,160.2 27-4 Japan - 5,384.2 15,409.4 -44,879.9 -62,685.5 15-4 Philippines 3.4 43.4 -37.9 38.3 -2,073.8 27-4 South Korea -101.8 300.7 1,868.0 2,626.1 -7,540.0 28-4 Sri Lanka -0.3 1.1 -6.9 -20.7 -78.4 27-4 Taiwan -24.1 212.1 1,095.2 6,076.2 1,777.5 27-4 Thailand -1.6 -41.3 -122.7 420.9 -3,757.6 27-4 Vietnam 2.8 -31.3 -75.4 -122.7 -111.0 27-4 Abu Dhabi 4.3 25.6 183.3 650.1 1,854.1 27-4 Source: Bloomberg, NCCPL 

Forex and Money Market snapshot Commodity Prices

Price Abs. Chg. % Chg. WTI (Crude Oil) 45.33 1.29 2.9

Gold 1,245.83 2.38 0.2

CRB Index 182.49 1.01 0.6 Source: Bloomberg

 Fundamental equity opinion key

Investment rating Total return expectation (within 12-month period of date of initial rating)

Buy ≥ 20% Neutral ≥ 0% Underperform N/A Source: KASB

Current  Previous  Chg. 6-Month KIBOR (Offer) 6.37 6.37 0.00 12-M T-Bill (Average) 6.26 6.23 0.03 10- year PIB (Average) 8.38 8.43 -0.05 PkR/ US$ 104.85 104.83 0.02 Source: KASB Money Market

World Markets and Commodity Prices