Pakistan Fertilizers Earnings Preview January 21, 2015 Fauji Fertilizer Bin Qasim Ltd Key risks to margins persist; Reiterate U/P Morning Shout PO raised to PRs42; reiterate Underperform We have lifted our PO for Fauji Fertilizer Bin Qasim (FFBL) by 17% to PRs42 from PRs36, on Ameet Daulat [email protected] +92 21 111 222 000 the back on (1) change in macro assumptions i.e. decreasing the risk-free rate to 10%, and (2) rolling forward our valuations. Furthermore, we believe market is unjustifiably excited on FFBL’s recent initiatives in diversifying its revenue and earnings base in consumer segments which may take 2-3 years to deliver any meaningful results for FFBL. Given the double whammy that FFBL faces in the case of gas price hike and consequently the weak outlook on margins, we reiterate our Underperform stance on FFBL. FFBL- Stock Data. Price Seasonal pickup in DAP demand to drive 4Q earnings PRs48.21 Price Objective PRs42.00 Date Established 21-Jan-15 Volatility Risk FFBL is set to announce its 4Q14 results on 29th Jan-15. We expect the company to declare NPAT of PRs2.4bn (EPS: PRs2.42) during the period, taking up full year earnings to PRs3.8bn (EPS: PRs3.95), down 34% YoY. We expect the company to declare a dividend of PRs2.5/sh in 4Q14, taking the full year payout of PRs4.25/sh. While cost increases pertaining to GIDC dominated the dip in profitability, we expect a 3%/8% YoY decline in the offtake levels of Urea/DAP, respectively, to keep the topline under check. This decline is partly attributable to 6% YoY decline in the production levels of DAP owing to gas supply issues in the first part of year. Cost increases during the year are expected to result in the gross margins of FFBL to clock in at 24.7% vs 29.1% in 2013. However, improved profitability of Askari Bank Limited (AKBL) and Fauji Cement Limited (FCCL) managed to slightly lift up the EBITDA margins. During 9M14, FFBL witnessed an increase in leverage to 40% as at Sep-14 end vs 29% D/A ratio in 2013. This is expected to keep the financial costs under pressure during 4Q14 and onwards. Monetary easing on the govt’s end will, however, bode well for FFBL. HIGH 52-Week Range PRs48.21-PRs37.75 Mkt Val / Shares Out (mn) US$446.76mn / 934 3m Avg. Daily Volume (shrs) 2,243,023 Bloomberg / Reuters FFBL PA / JORD.KA ROE (2015E) 35.00% Net Dbt to Eqty (2015E) 52% Est. 5-Yr EPS / DPS Growth -1% / -12% Free Float 35.00% Diversification on track but overplayed FFBL – Financial Summary PRs mn 2013 2014E YoY Sales Revenue 54,455 49,704 -9% Gross Profit 15,873 12,276 -23% EBITDA 11,276 8,378 -26% EBT 8,362 5,325 -36% Net Profit 5,613 3,693 -34% EPS 6.01 3.95 DPS 5.50 4.25 Source: KASB Research In line with the Fauji group’s vision to diversify, FFBL has also been keen on diversifying its business risks in the fertilizer segment and also move into the Foods business. During 4Q14, FFBL incorporated three wholly-owned subsidiaries: Fauji Meat Ltd: To indulge in the halal slaughtering of animals and sale in the domestic and foreign markets. With a project cost of PRs6.4bn, it is expected to come online in 4Q15. The company is expected to secure financing for its Meat project during 1Q15. Foods segment: While FFBL is believed to be in process of conducting market research for Fauji Foods, it has shown interest in acquiring 24.9% non-voting shares and 24.9% voting shares of Noon Pakistan ltd (NOPK). FFBL is believed to be targeting the dairy and juices segment of NOPK (Nurpur). -23% FFBL Power company Ltd: Setting up an 118MW plant at Port Qasim will potentially counter the gas supply issues which have been hampering the operations of the fertilizer business. Given the vicinity of its plant, switching to coal is more feasible for FFBL than its peers. 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 own investment 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. Page 1 Fauji Fertilizer Bin Qasim Ltd – January 21, 2015 Morning News KSE-100 Intra-day Movement FIPI 34,172 Govt holds OGRA responsible for petrol crisis (BR): The conclusion of the PM’s meeting on the petrol crisis was that the petrol shortage was a serious failure on the part of Oil and Gas Regulatory Authority (OGRA) as a regulator. The report has not been released by the Prime Minister's office or uploaded on any government website; however, a press release was issued that contended that the committee had held OGRA, the regulator, responsible for the crisis. High 34,187 34,131 34,090 PSO buys petrol from Shell Pakistan (BR): PSO purchased an additional 10,000MTs of petrol from Shell Pakistan and claimed to have successfully managed to overcome the fuel shortages occurring in some parts of Punjab province. The additional fuel was bought from a vessel imported by Shell Pakistan which arrived here Tuesday. Further, the state-run oil giant said to have increased its import of white oil products (petrol) and enhanced upliftment from local refineries. 34,049 34,008 33,967 33,926 Low 33,892 33,885 9:30 AM 10:56 AM 12:20 PM 1:45 PM 3:10 PM Source: KASB Research Thar coal, power project to start operations in 2018 (Tribune): Sindh Engro Coal Mining Company (SECMC), which is working in Thar on coal-based power production, has announced it will be able to supply 660MW of electricity to the national grid by the first quarter of 2018 if the project’s financial closure is achieved this year. Index Data & Volume Leaders Close KSE30 KSE100 KSE All Share PSO ENGRO MLCF DGKC NBP % Chg Vol. US$ mn 22,116.60 34,121.30 0.4% 0.3% 117.45 146.57 24,623.49 380.35 268.56 50.35 123.82 70.76 0.2% 2.2% -0.7% 3.9% 3.7% 0.7% 186.08 24.79 14.56 13.30 12.64 6.83 Source: KSE KSE-100: Top Gainers & Losers FIPI Technical View Ahmed Hanif [email protected] KSE-100: Approaching the upper monthly Bollinger band The index formed a higher high and a higher low, formed a new all-time high and again closed above 34,000. The index could target the upper monthly Bollinger band, which is currently at 34,700 as it has been forming higher highs and higher lows. Oil & gas sector (POL and PSO) and banking sector (UBL, NBP, HBL and MCB) are looking attractive at current levels and might guide the index towards new highs. It is recommended to accumulate trading positions on weakness with risk defined below 33,000. INDU MARI CEPB MLCF DGKC DAWH NCL PICT ISL PCAL -6% -4% -2% 0% 2% 4% 6% Source: KASB Research Page 2 Fauji Fertilizer Bin Qasim Ltd – January 21, 2015 World Markets and Commodity Prices International Equity Markets Asian Markets (Last trading session’s) European Markets (Last Trading Session’s Rates) Price All Ordinaries Shanghai Composite Hang Seng BSE 30 Jakarta Composite KLSE Composite Nikkei 225 NZSE 50 Straits Times Seoul Composite Taiwan Weighted KSE-100 Index Abs. Chg. 5,286.82 3,173.05 23,951.16 28,784.67 5,166.09 1,750.11 17,366.30 5,633.22 3,334.02 1,918.31 9,251.69 34,121.30 -2.2 56.7 212.7 522.7 14.0 -3.2 352.0 -4.9 26.3 15.7 77.6 107.0 % Chg. Price -0.04 1.82 0.90 1.85 0.27 -0.18 2.07 -0.09 0.80 0.82 0.85 0.31 ATX BEL-20 CAC 40 DAX AEX General Swiss Market FTSE 100 American Markets Dow Jones Ind. Average NASDAQ Composite NASDAQ -100 S&P 500 Index, RTH Abs. Chg. % Chg. 2,170.24 3,403.04 4,446.02 10,257.13 437.92 8,178.90 6,620.10 22.1 7.1 51.1 14.8 2.6 26.1 34.6 1.0 0.2 1.2 0.1 0.6 0.3 0.5 17,515.23 4,654.85 4,171.21 2,022.55 3.7 0.0 20.5 29.1 3.1 0.4 0.7 0.2 Source: Bloomberg Foreign Portfolio Investment in Equities Country Day (US$mn) Pakistan India Indonesia Japan Philippines South Korea Sri Lanka Taiwan Thailand Vietnam Abu Dhabi Qatar WTD (US$mn) 5.4 67.6 (26.8) N.A (6.1) (20.8) (0.2) 291.4 (25.1) (0.1) (4.5) (10.4) MTD (US$mn) 5.8 67.6 (82.6) (5,776.4) (0.2) (36.3) 0.4 584.5 (55.7) 1.9 (24.3) 4.9 3.6 223.3 (229.1) (6,114.1) 361.8 (867.7) (3.2) (454.6) (586.4) 2.8 (56.8) (90.1) YTD (US$mn) 12M (US$mn) 3.6 223.3 (229.1) (6,114.1) 361.8 (867.7) (3.2) (454.6) (586.4) 2.8 (56.8) (90.1) 382.6 15,990.5 3,267.2 17,883.4 1,644.5 5,005.2 150.4 11,536.8 (1,628.9) 63.0 838.1 1,931.6 Date 20-01 19-01 20-01 09-01 20-01 20-01 20-01 20-01 20-01 20-01 20-01 20-01 Source: Bloomberg, NCCPL Forex and Money Market snapshot Current 6-Month KIBOR (Offer) 12-M T-Bill (Average) 10- year PIB (Average) PkR/ US$ Source: KASB Money Market 9.23 8.95 10.18 100.75 Previous 9.27 8.82 10.08 100.78 Chg. -0.04 0.13 0.10 -0.03 Commodity Prices Price WTI (Crude Oil) Gold CRB Index Source: Bloomberg 46.39 1,295.40 218.97 Abs. Chg. % Chg. -2.30 19.75 -5.26 -4.7 1.5 -2.3 Page 3
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