1.
Fortune Securities Limited | Equity Research
Manufacturers might cut urea prices
As per our industry channel checks and media reports a reversal in the recent
increase in Urea prices might be on the way. The industry is leaning towards a cut of
PKR 145/bag instead of a complete reversal. However, any effective final price for
urea that is agreed upon by the major fertilizer producers could depend on a partial
or complete reversal in gas tariffs. We expect that the major players will demand a
complete reversal in feed gas tariff. Thus, we have provided a scenario analysis on
how changes in Urea prices and gas tariff could impact the earnings of the firms in
CY16.
A complete reversal in urea prices without any change in gas tariffs is unlikely but
serves as a good benchmark for the analysis. Any kind of reversal in urea prices
would reduce the competitive advantage to both EFERT and FATIMA due to
concessionary gas.
FFC: If a complete reversal in urea prices back to PKR 1823/bag takes place and gas
tariff is reduced to pre‐September levels, we expect FFC to post margins of 40% and
EPS of PKR 15.03 for CY16 against our current expectation of PKR 15.53. The reason
for the difference is that FFC needed to raise Urea prices by less than PKR 135/bag
to neutralize the impact of gas tariff increase, but raised the prices instead by PKR
160/bag. On the flip side if Urea prices are reduced and gas tariffs remain the same
FFC’s earnings could decline to PKR 11.86/share which we believe is unlikely.
FFBL: Any reversal in gas tariff would also have a positive impact on the DAP & NP
business. The negative impact on the margins of DAP due to increased gas tariffs
would be neutralized significantly (both feed gas and phosphoric acid are utilized in
the DAP production process). However, we believe phosphoric acid prices have the
potential to increase further from current levels and could dent FFBL margins (we
have assumed a 6% increase in phosphoric acid prices in CY16).
A negative impact on FFBL profitability would also lead to lower dividend income to
FFC in each of the scenarios. For FFBL we expect an EPS of PKR 3.47 in CY16 against
EPS of PKR 3.91 in case of complete reversal of urea prices and cut in gas tariff. We
have not incorporated the impact of any of FFBL’s energy and food companies in the
EPS analysis.
Fertilizer
Sector Update
15th
Oct, 2015
Fortune Securities Ltd.
Aijaz Siddique
Phone: +92‐21‐35309112
aijaz.siddiqe@fortunesecurities.com
Target Price
Fatima
Target Price 56.20
Upside 24%
Rating BUY
EFERT
Fair Value 106.30
Upside 15%
Rating BUY
FFBL
Fair Value 65.30
Upside 9%
Rating HOLD
FFC
Target Price 129.20
Upside 2%
Rating HOLD
Source: Fortune Research
EPS CY16
Current Urea price
and gas tariff
Complete reversal in
urea price and gas tariff
Only reversal in urea
price
FFC 15.53 15.03 11.86
FFBL 3.47 3.91 3.04
FATIMA 6.23 6.06 5.88
EFERT 11.79 10.38 9.99
Source: Fortune Research

2.
Fortune Securities Limited | Equity Research
FATIMA: As opposed to FFC and FFBL, any reversal in urea price would deteriorate
the EPS of FATIMA as it would impact the profitability of Urea and CAN businesses.
Following complete reversal in urea prices and gas tariff we expect FATIMA to
record EPS of PKR 6.06 in CY16 against our current expectation of PKR 6.23. We
have not adjusted our forecasts for the operations of DHFL, which is currently
operating on gas from the SNGP network. FATIMA is trying to secure subsidized
LNG for DHFL.
EFERT: In case of EFERT we have assumed that the new plant will operate at full
utilization levels in CY16, while the old plant will be operating at a fraction of its
current capacity due to reduced gas. Due to the conservative approach, our EPS
estimate is PKR 11.79 for CY16 in the current scenario and PKR 10.38 in case of a
reversal to pre‐hike levels.
Investment Stance:
Our view on the individual firms within the sector is formed by macro trends
toward diversification and consolidation within the sector, as well as individual
firm characteristics that give competitive advantage to FATIMA and EFERT. We
believe FFC leaves much to be desired on the diversification front, unlike FFBL
which has invested in attractive projects in the energy and food business.
In case of Fatima and EFERT we have considered the following factors:
Availability of concessionary gas to FATIMA and EFERT
Discontinuation of gas to EFERT in CY16
Deleveraging benefits to accrue to EFERT in the future due to low
interest rate environment
Debottlenecking project under way at FATIMA
Improved operations of DHFL on availability of gas in future
Fatima’s potential investment in Midwest Fertilizers
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Earnings Yield CY15E CY16E
FFC 11% 12%
FATIMA 11% 14%
EFERT 13% 13%
FFBL 6% 6%
EPS CY15E CY16E
FFC 14.45 15.53
FATIMA 5.22 6.23
EFERT 11.94 11.79
FFBL 3.86 3.47
Dividend Yield CY15E CY16E
FFC 11% 12%
FATIMA 7% 10%
EFERT 8% 8%
FFBL 5% 6%
DPS CY15E CY16E
FFC 13.73 14.76
FATIMA 3.39 4.36
EFERT 7.76 7.67
FFBL 3.29 3.45
Source: Fortune Research