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FATIMA Fertilizer Co. Ltd.

Insight

Price: PkR23.43, Target Price: PkR41.52. Poten al Upside: 77%


April 6, 2012

AKD Equity Research / Pakistan

FATIMA: Unconventionally Yours !


Naeem Javid
Investment Analyst
naeem.javid@akdsecuri es.net
Priced on April 04, 2012
KSE100 Index
13,945.30
KSE Market Cap
PkR3,575bn (US$39,291mn)

Buy

We ini ate coverage on Fa ma Fer lizer Company (FATIMA) and place the stock on our
convic on call list with a Dec12 target price of PkR41.52/share Buy! Our convic on is
underpinned by rela vely low gas curtailment of 8%12% from the Mari network, subsi
dized feedstock gas for 10yrs at US$0.7/mmbtu and undemanding valua ons in a tradeo
for growth (PEG: 0.26). We expect NPAT to log in at an impressive 33% CAGR across CY11A
CY15F, led by topline growth. At the same me, we believe the market is missing poten al
tax advantages where deferred taxa on adds an es mated PkR7.50/share to our target
price. While FATIMA has gained 2.2%CYTD, it has underperformed the AKD Fer lizer Uni
verse by 21%CYTD where we believe the market is under apprecia ng the gradual ac
ceptance of FATIMAs unconven onal product line.

Higher Margin Lower Curtailment! FATIMAs compe


KATS Code
Bloomberg Code
Price PkR

FATIMA
FATIMA.PA
23.43

Market Cap (PkRmn)


Market Cap (US$mn)
Shares (mn)

43,346
476
2,000

3M High (PkR)
3M Low (PkR)

25.61
21.35

1Yr High (PkR)


1Yr Low (PkR)

26.52
12.28

3M Avg Turnover '000


1 Yr Avg Turnover '000

5,724
4,268

3M Avg DT Value (PkR'000)


3M Avg DT Value (US$'000)

135,850
1,493

1Yr Avg DT Value (PkR'000)


1Yr Avg DT Value (US$'000)

90,136
991

140%
120%
100%
80%
60%
40%
20%
0%
-20%
Jun-11
Sep-11
KSE-100 Index

Deferred Tax Realizing Time Value of Money: Tax deprecia on on fixed assets is charged
at 50% in the 1st year and at 10% - 30%, for dierent categories of fixed assets, from the 2nd
year onwards. Since FATIMA has capitalized PkR68.6bn in CY11E, as per our es mates, its tax
deprecia on will likely be high enough to trigger tax losses (not accoun ng loss). As a result,
FATIMA will be subject to minimum applicable tax rate of 1% of revenue for first five years of
opera ons (CY11A-CY15F), resul ng in cash savings of PkR1.8bn PkR6.9bn over CY11ACY15F. Going by the me value of money, the contribu on of deferred tax to our DCF-based
share price arrives at PkR7.50/share (18% of total TP).
Market is under apprecia ng Product Suite: With FATIMAs unconven onal product suite,
we have stress tested sales levels for unconven onal fer lizers CAN and NP. Based on our
stress tes ng, we believe the market is under apprecia ng FATIMAs unconven onal product
suite and is valuing FATIMA at lower sales levels (30% of capacity for both CAN and NP) in
line with our worst case es mates (see stress tes ng on page 7). The upside from current
market price in our view is the coupling of price performance with higher levels of acceptance for the unconven onal product line by end buyers where we es mate CAN and NP
sales at 60% and 45% of capacity, respec vely, for CY12 and at a constant 82% and 55%, respec vely, through forecast range.

FATIMA vs. KSE-100 Index

Mar-11

ve advantage stems from lower


input cost, where the companys feedstock requirement has been locked in for a period of 10
years at US$0.7 per mmbtu (as dictated by Fer lizer Policy 2001). This translates into feedstock cost of PkR60.67 per mmbtu for FATIMA 80% lower rela ve to peer group. Moreover,
the companys 110mmcfd requirement is being met from the Mari based network, resul ng
in annual curtailment of about 8%-12% (Sui network: ~40%). Eec vely, this allows FATIMA
to piggy-back on Sui based fer lizer plants in the event of urea price hikes due to gas curtailment and/or rise in feedstock cost. A PkR100 per bag ex-factory urea price increase (coupled
with PkR80 per bag increase in ex-factory CAN price) raises our CY12F EPS and TP by PkR0.29
and PkR3.60/share, respec vely.

Dec-11
FATIMA

Apr-12

Source: AKD Research

Valua on & Investment Perspec ve: DCF-based valua on leads us to a Dec12 target price
of PkR41.52/share for FATIMA. We have conserva vely a ached a beta of 1.25 and an equity
risk premium of 6% in view of a higher risk profile (US pressure on CAN produc on, unconven onal product suite & higher leverage with D/A at 51% on CY11E), leading to 19.5% cost
of equity. Despite gaining 79% over the last one year, FATIMAs valua ons are undemanding
against trade o for growth (5yr NPAT CAGR: 33%) where our target price oers 77% upside
BUY!

Important Disclosure: Important disclosures including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the
report. Investors should consider this report as only a single factor in making their investment decision.

AKD Securities

Member: Karachi Stock Exchange

Find AKD research on Bloomberg


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and Reuters Knowledge
Exchange

Copyright2012 AKD Securities Limited. All rights reserved. The information provided on this document is not
intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or
use would be contrary to law or regulation or which would subject AKD Securities or its affiliates to any registration
requirement within such jurisdiction or country. Neither the information, nor any opinion contained in this document
constitutes a solicitation or offer by AKD Securities or its affiliates to buy or sell any securities or provide any investment advice or service. AKD Securities does not warrant the accuracy of the information provided herein.

www.akdsecurities.net

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Global Urea Dynamics


Global Urea & DAP Consumption (mn tons)
mn (tons)
160

UREA

140

DAP

120
100
80
60
40
20
CY10

CY09

CY08

CY07

CY06

CY05

CY04

CY03

CY02

CY01

CY00

Source: IFA

Will Interna onal Urea Prices Break?


Urea, the most commonplace among nitrogenous fer lizers, accounts for about 60% of total
global fer lizer o-take, with a current global demand of 155.3mn tons a er having posted
an impressive CAGR of 3.3% over the last 10 years. Of key note is the stability in product otake growth, where other fer lizers such as DAP have shown vola lity in volumetric sales.
This vola le movement was par cularly visible during the burst of the commodity bubble in
CY08-CY09. One of the key reasons, we believe, for the stability of interna onal urea o-take
is the products pricing in various countries, where India (providing direct subsidy) and Pakistan (providing indirect subsidy) count amongst countries which heavily subsidize the product to en ce increased consump on and increase crop yields.
The Case for Stable Urea Prices! We point to two reasons for our expecta on of likely stable
to downward s cky urea prices. The first and foremost being interna onal oil price while the
second one being the heightened focus on increasing yields to improve food produc on.
Higher Oil, Higher Urea! Like most commodi es, urea prices are highly correlated with interna onal oil prices (correla on of 88%). With downward s cky interna onal oil price, urea
prices will likely follow the same trend. That said, skep cs point to special circumstances with
regards to the Iranian conflict and thus a likely decline in interna onal oil prices upon a deescala on in geopoli cal tension. Even if that happens, oil prices (and consequently urea
prices) are unlikely to fall sharply given GCCs es mated breakeven oil price of US$85 per
barrel (floor level with GCC looking to spend sharply to curb lingering Arab spending a er
shocks).
Urea & Oil Price Correlation of 88%
120

600

100

500

GCC is es mated to breakeven at oil


price of US$85/bbl. High fiscal spending packages entail oil prices are likely
to stay above US$85/bbl even on dips

80

400

Oil (US$/bbl)
Urea (US$/ton) - (RHS)

60

300

40

200

20

100

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

0
1981

Source: WB & AKD Research

Food Security: Increasing crop yields has become the focus of-late owing to the explosion of
global popula on over the last century. The only way to provide food to the increasing popula on, with limited area under cul va on, is to increase yield by applying more fer lizer!
Urea & Food Correlation of 82%
250

600

500

200
Food Price Index

400

Urea (US$/ton) - (RHS)


150

300
100
200
50

100

2011

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

Source: WB & AKD Research

AKD Securities Limited


April 6, 2012

Food Price Index


260.0
240.0

Fatima Fertilizer Company

With the FAO index reaching its 5-month high in Feb12 and global cereal stock to use ra o
s ll below its 10 year historic average, we are likely to see increased fer lizer use over the
coming years, helping maintain fer lizer (par cularly urea) prices in the long run.
World Cereal Stock to Use Ratio

220.0
200.0

180.0

24.5

160.0

23.5

10yr avg.

140.0

22.5

120.0

21.5
1/2007
5/2007
9/2007
1/2008
5/2008
9/2008
1/2009
5/2009
9/2009
1/2010
5/2010
9/2010
1/2011
5/2011
9/2011
1/2012

100.0

20.5
19.5

Source: World Bank and AKD Research

18.5
2011/12

2010/11

2009/10

2008/09

2007/08

2006/07

17.5

Source: WB &AKD Research

Urea Price Outlook: Our regression analysis of urea with oil price leads us to forecast intl
urea price at US$494/ton with current oil price at US$125/bbl (word bank basket of oil prices). Our intl urea price assump on is at US$425 inline with our long term oil price assumpon.
Oil & Urea regression es mates
US$50

US$25

Base Case

+US$25

+US$50

75

100

125

150

175

315

404

494

584

673

Oil (US$/bbl)
Urea (US$/ton)

Source: World Bank & AKD Research

Intl urea prices have an indirect rela onship with urea exports from China. As China has
imposed higher trade taris on urea exports during peak demand seasons, we see limited downside risk in intl urea prices.
China Export trend mitigating downward price risk
2,500

775

Exports (k tons)
Urea (US$/ton) - (RHS)

2,000

675
575

1,500

475
1,000
375
500

275

Aug-11

Nov-11

Feb-11

May-11

Aug-10

Nov-10

Feb-10

May-10

Nov-09

Aug-09

Feb-09

May-09

Aug-08

Nov-08

Feb-08

May-08

Aug-07

Nov-07

May-07

Feb-07

Aug-06

Nov-06

Feb-06

May-06

Aug-05

Nov-05

175

Feb-05

May-05

Lower intl urea price pose risk that it


will limit domes c urea manufacturers
pricing power

Source: Bloomberg & AKD Research

Chinese Urea export taris


Peak Season
O-Peak

Jan-Jun, Nov-Dec
Jul-Oct

Provisional Tax
35%
-

Special Tax
75%
7%

Total Tax
110%
7%

Floor Price
Rmb2,100/mt

Source: Bloomberg & AKD Research

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Our Case...
Higher Margin Lower Curtailment!

Retail Urea Price (PkR/bag)

FATIMAs compe ve advantage stems from lower input cost, where the companys feedstock requirement has been locked in for a period of 10 years at US$0.7 per mmbtu (as dictated by Fer lizer Policy 2001). This translates into feedstock cost of PkR60.67 per mmbtu for
FATIMA 80% lower rela ve to peer group. Moreover, the companys 110mmcfd requirement is being met from the Mari based network, resul ng in annual curtailment of about 8%12% (Sui network: ~40%). Eec vely, this allows FATIMA to piggy-back on Sui based fer lizer
plants in the event of urea price hikes due to gas curtailment and/or rise in feedstock cost. A
PkR100 per bag ex-factory urea price increase (coupled with PkR80 per bag increase in exfactory CAN price) raises our CY12F EPS and TP by PkR0.29 and PkR3.60/share, respec vely.

1,950
1,750
1,550
1,350
1,150
950
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12

750

Source: NFDC

Impact of Urea (including CAN) price increase on CY12F EPS & TP


Increase in exfactory urea price

Base Case

+PkR100

+PkR200

+PkR300

Reten on urea price per bag (PkR)

1,543

1,629

1,715

1,802

Reten on CAN price per bag (PkR)

1,250

1,319

1,388

1,457

CY12F - EPS (PkR)

2.74

3.03

3.32

3.61

Target Price (PkR)

41.52

45.12

48.78

52.36

Source: AKD Research

Deferred Tax Realizing Time Value of Money


Deferred tax adds PkR7.5/share to our
target price

Tax deprecia on on fixed assets is charged at 50% in the 1st year and at 10% - 30%, for dierent categories of fixed assets, from the 2nd year onwards. Since FATIMA has capitalized
PkR68.6bn in CY11E, as per our es mates, its tax deprecia on will likely be high enough to
trigger tax losses (not accoun ng loss). As a result, FATIMA will be subject to minimum applicable tax rate of 1% of revenue for first five years of opera ons (CY11A-CY15F), resul ng in
cash savings of PkR1.8bn PkR6.9bn over CY11A-CY15F. Going by the me value of money,
the contribu on of deferred tax to our DCF-based share price arrives at PkR7.50/share (18%
of total TP).
Deferred Taxation - Big benefit across first 5 years
14,000
12,000
10,000

Taxation Expense (PkRmn)


Taxation to be paid (PkRmn)

8,000
6,000
4,000
2,000
CY11A

CY12F

CY13F

CY14F

CY15F

CY16F

CY17F

CY18F

CY19F

Carbon Emission Rights per credit (US$)

CY20F

CY21F

CY22F

Source: AKD Research

25.0

Carbon Credits Much Discussed But Li le Impact


20.0

Management of the company expects to register with UNFCCC (United Na ons Framework
Conven on on Climate Change) for carbon credits during 2QCY12. Taking a conserva ve
stance, we have incorporated CER credits revenue from 2HCY12. As Pak Arab Fer lizer Company is also availing such CER credits, it is likely that FATIMA will also register with UNFCC.
We have assumed CER credits, tradable under Kyoto Protocol, to earn US$5 per credit over
the life of project. The companys bo omline will get a nominal boost from carbon credits,
amoun ng to PkR58mn PkR156mn over the next 5 years (EPS impact: PkR0.02 PkR0.07).

15.0
10.0
5.0
Mar-09

Mar-10

Mar-11

Mar-12

Source: Bloomberg

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Unconven onal Product Suite

Forecasted Revenue Composition


100%
80%

NP

60%
CAN

40%
20%

Urea

Sales assump on as %age of capacity


Products
Urea
CAN
NP

CY21F

CY20F

CY19F

CY18F

CY17F

CY16F

CY15F

CY14F

CY13F

CY12F

0%

Currently, FATIMA is producing three of its product lines i.e. Urea, CAN & NP. Urea is the
highest profit margin contributor to the company followed by CAN and NP, respec vely. Our
capacity u liza on assump on revolves on ammonia produc on where we have assumed it
to be opera onal at 95% capacity. Being on the conserva ve side, we have not incorporated
debo lenecking of the ammonia plant. Our sales forecast (as %age of capacity) for the product suite is provided below:

Source: AKD Research

CY11 A
88%
85%
51%

CY12 F*
74%
60%
45%

CY13 F
95%
82%
55%

CY14 F
95%
82%
55%

CY15 F
CY16 F
95%
95%
82%
82%
55%
55%
Source: AKD Research

*LowersalesinCY12duetoglutofimportedurea

Keeping historic growth trend in Urea and CAN prices in view, we have forecasted increase in
the price of urea to be 7% p.a. while CAN price is forecasted to be at 20% discount to urea
price. We have provided a sensi vity of our NPAT CAGR through CY11A-CY15F with variable
Urea and CAN prices increase.

Retail Urea versus CAN Prices (PkR/bag)


3,900
3,400

CAN PkR/bag

2,900

Urea PkR/bag

Sensi vity of NPAT CAGR with annual increase in Urea (including CAN) price

2,400
1,900

99.5% Correla on
Annual increase in sale price (Inc. CAN)

1,400

CAGR (CY11A-CY15F)

900
Jan-12

Nov-11

Jul-11

Sep-11

May-11

Mar-11

Jan-11

Nov-10

Jul-10

Sep-10

May-10

Mar-10

Jan-10

400

Source: NFDC

Higher intl urea prices restrict downside risk for urea price

2%

Base case

+2%

+3%

5%

7%

9%

10%

30%

33%

36%
37%
Source: AKD Research

Urea
Because of the alkaline nature of Pakistans soil, nitrogenous fer lizer is widely used in the
country with urea being the most popular. In CY11, total urea applied across the country
declined for the second consecu ve year to 5.92mn tons, down by 3.3%YoY, primarily due to
decline in urea produc on to 4.5mn tons, implying urea produc on deficit of 1.42mn tons on
the back of enduring gas curtailment. As such local manufactured urea o-take in CY12TD
has suered due to the abundance of cheap imported urea. However, with the recent hike in
imported urea prices by PkR300/bag (bringing it to PkR1,600/bag) and run down in stock of
imported urea, we expect local o-take rates to improve going forward. Our sales assumpon takes care of this trend where we have assumed urea to be sold at 74% of capacity in
CY12F and at 95% from CY13F onwards. Over the medium to long term, we see limited
downside risks to urea prices as intl urea prices have likely bo omed out and should stay
downward s cky. There is s ll a significant gap between intl and local manufactured urea
prices (dieren al 22% between landed cost of imported fer lizer and retail price of urea).
Historically, Engro has taken the lead to revise urea price in reac on to increase in gas curtailment. The likely risk is that Engro may decrease urea price if it receives con nued gas
supply. In the short term, we believe it is unlikely that Engro will reduce urea price despite
GoP assurances for con nued supply of gas. Even if Engro is supplied gas from La f gas field,
the process will take significant me as the field is ~100km from the Enven plant (as per
news reports). If urea price is decreased by PkR100/bag, it has a limited impact of PkR0.29 on
CY12F EPS & PkR3.90/share on our DCF based target price, the la er s ll providing upside
poten al of 61%. The following table contains impact of a decrease in urea price on CY12F
EPS and TP.
Impact of Urea (including CAN) price decrease on CY12F EPS and TP
Decrease in exfactory urea price
Reten on urea price per bag (PkR)
Reten on CAN price per bag (PkR)
CY12F - EPS (PkR)
Target Price (PkR)

Base Case
1,543
1,250
2.74
41.52

PkR100
1,457
1,181
2.45
37.62

PkR200
1,371
1,112
2.16
33.97

PkR300
1,284
1,043
1.87
30.29

Source: AKD Research

CAN Expected to Remain in Demand with Urea Shortage


CAN is applied as a subs tute of urea where retail price of CAN is PkR1,445/bag, about
PkR373/bag lower than urea price. Over CY01-CY09, CAN consump on has ranged between

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

CAN Consumption Pattern in Pakistan


140

300-380k tpa with the narrow range persis ng due to constant produc on capacity resul ng
in lower product availability. Over CY10 & CY11, sales have picked up to 491k tpa and 676k
tpa respec vely, due to addi on in produc on capacity by FATIMA.

FATIMAhasaverage56%market
shareintotalCANsales.

120

That said, CAN has s ll to fully catch on within the farmers circle as a nitrogenous fer lizer,
where its primary use has been subs tu on for urea. Although CAN contains important nonprimary nutrients e.g. Ca, P, Mg, S & Cu, its rela vely low nitrogen content suppress farmer
preferences for CAN. Nitrogen content is approximately ~41% more expensive in CAN than in
urea where our long term CAN sale assump on (82% of capacity vs. 95% for urea) accounts
for this fact.

100
80
60
40
20

Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12

FATIMA CAN Sale (k tons)

CAN Sales (k tons)

Note: 2MCY12CANotakeisspoiledbyglut
ofimportedureawhereweforeseethissitua
ontoimproveby2QCY12.
Source: NFDC

CAN vs. Urea


Product
Urea
CAN

Nitrogen (N)
46%
26%

N (kg)/bag
23.0
13.0

Price/bag
1,818
1,445

Cost (PkR)/N Kg
79
111
Source: AKD Research

Given the expected dierence between supply and demand of urea in the foreseeable fu
ture, we an cipate limited downside to CAN demand.
BAN on CAN (Con ngency Planning): The US House of Representa ves has passed a bill that
calls for a major por on of military assistance to Pakistan to be frozen un l Pakistan shows
progress in ac ng to stem the flow of IEDs (Improvised Explosive Devices) and ammonium
nitrate into Afghanistan. An cipa ng that produc on of CAN may come under the radar
of such legisla on by the US, we have provided dierent scenarios in case of an outright
ban on the produc on of CAN. Scenarios include par al remedy provided by GoP and increase in urea sales (in an cipa on of increase in demand with CAN shortage).
Scenario
Base Case Scenario
Worst Case Scenarios:
Scenario A
Scenario B
Scenario C

GoP Remedy
N/A

Demand Urea
No Change

No
No
15% Return on CAN investments*

Increase
Increase
Increase

*WithassumedCANinvestmentofPkR14.7bn

70
60
50
40
30
20
10

NP Sales (Ex-Fatima) K-tons

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Jan-10

Apr-10

Source: NFDC

Base case
25.09
100% Capacity
27.43
100% Capacity
34.52
Source: AKD Research

NP has been the laggard among FATIMAs product mix where the company is s ll looking for
NP sales to pick up. With installed capacity of 360k tons, FATIMA started commercial producon of NP in June10 and managed to sell 51.5% of its capacity over a 7-month period. We
have forecasted CY12 sales at 45% of capacity on the back of lower o-take in 1QCY12 coupled with a glut of imported urea. Although NP is not a direct subs tute of urea, glut of imported urea is hur ng NP o-take.

FATIMAhasaverage40%
marketshareintotalNPsales.

FATIMA Sales K-tons

TP (PkR/share)
41.52

NP The Laggard

NP Consumption in Pakistan
80

Urea Sales
Base Case

Considering that the phosphate nutrient is approximately ~50% more expensive in NP relave to DAP and produc on from Pak Arab will keep sale levels for FATIMAs NP line rela vely
low, we have assumed NP sales for FATIMA to remain between 45% - 55% of capacity
through the forecast range.
NP vs. DAP: Nutrient wise comparison between the subs tutes
Product

There is marginal dierence between NP DAP


and DAP in terms of %age N content)
NP

Nitrogen (N)
18%
20%

NPK

Phosphate (P2O5)
46%
20%

Price per bag


4,132
2,698

Cost (PkR)/P2O5Kg
180
270
Source: AKD Research

FATIMA has not yet started the produc on of NPK. NPK is a non-conven onal fer lizer in
Pakistan with limited demand prospects in the short term, in our view. At present, FATIMA
does not have adequate supply of ammonia to produce its exis ng three products at 100%
capacity, linking NPK produc on to addi onal ammonia capacity via future debo lenecking.
We have not incorporated the produc on of NPK in our base case es mates.

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Unconven onal Fer lizers Stress Test Analysis


Based on our stress tes ng, we believe
the market is under apprecia ng FATIMAs unconven onal product suite
and is valuing FATIMA at lower sales
levels (30% of capacity for both CAN
and NP) and lower NP primary margins at US$350/ton in line with our
worst case es mates

The Market is Under Apprecia ng FATIMAs Product Suite: With FATIMAs unconven onal
product suite, we have stress tested sales levels for unconven onal fer lizers CAN and NP.
Based on our stress tes ng, we believe the market is under apprecia ng FATIMAs unconvenonal product suite and is valuing FATIMA at lower sales levels (30% of capacity for both CAN
and NP) in line with our worst case es mates. The upside from current market price in our
view is the coupling of price performance with higher levels of acceptance for the unconvenonal product line by end buyers where we es mate CAN and NP to be sold at 60% and 45%
of capacity, respec vely, for CY12 and at a constant 82% and 55%, respec vely, through forecast range.
Base case assump ons
Base Case Es mates for Target Price of PkR41.52/share

CY12F

CY13F

CY14F

CY15F

CAN Sales as %age of Capacity

60%

82%

82%

82%

NP Sales as %age of Capacity

45%

55%

55%

55%

Urea and CAN Annual Price Increase


PM of NP/ton (US$)

7%

7%

7%

7%

400.00

400.00

400.00

400.00

Source: AKD Research

Current market share price places


sales levels at 30% of capacity for both
products with NP primary margins at
an extremely conserva ve US$350/
ton, in our view.

Current market price implies that market is under-apprecia ng gradual acceptance of FATIMAs non-conven onal product suite and higher NP primary margins. Through CY11, FATIMA
logged in sales at 85% and 51.5% of capacity on CAN and NP, leading to sales volumes of
358ktpa and 108ktpa, respec vely. Addi onally, through CY11, NP primary margins averaged
US$478/ton and are currently averaging US$430/ton CY12TD. Our base case outlook forecasts CAN and NP sales to average 60% and 45% of capacity, respec vely, through CY12F and
82% and 55% through forecast range with NP primary margins at US$400/ton. Contrary to
our es mates, current market share price places sales levels at 30% of capacity for both
products with NP primary margins at an extremely conserva ve US$350/ton, in our view.
Assuming equal capacity rates for CAN and NP while reducing the levels by 10% intervals (for
sensi vity purposes) impacts our target price by PkR4/share PkR4.5/share where sales at
30% of capacity place FATIMAs target price at PkR26.25/share. This assumes urea sales at
95% of capacity (base case es mate) coupled with 7% annual price increase in Urea and CAN
which we view as realis c premised on high oil price and food index correla ons (see page
2).
Sensi vity of TP with sales levels (as %age of capacity)
Sales as %age of Capacity
CAN Capacity Based TP Es mates

Base Case
41.52

50%
35.37

40%
33.38

30%
31.42

20%
29.31

10%
27.12

0%
25.09

NP Capacity Based TP Es mates

41.52

40.47

37.95

35.43

32.83

30.28

27.61

NP and CAN Based TP Es mates

41.52

34.46

30.45

26.25

22.09

17.77

13.24

Source: AKD Research

Our stress tes ng for Urea and CAN prices shows the market is valuing FATIMA at flat annual
prices which we view as unrealis c. Tes ng shows that FATIMA making our Buy list with a
minimum 3% annual price increase for both Urea and CAN while Accumulate ra ngs are
placeable between 1%-2% annual price increases for both products. This assumes that CAN
and NP sales clock in at our base case es mates.
Sensi vity of TP with annual increase in Urea & CAN prices
Annual (+%) Urea & CAN Prices
Target Price (PkR)

10%

7%

5%

3%

2%

1%

51.80

41.52

35.49

30.16

27.81

23.53

Source: AKD Research

We have also stress tested FATIMA for variable NP primary margins which have remained
highly vola le over the last 5 year period. Over the last 4 years, NP primary margins have
averaged US$380/ton and have increased at a CAGR of 21% through the last decade.
Through CY11, NP primary margins averaged US$478/ton while running CYTD NP primary
margins are averaging US$430/ton. Our stress tes ng for NP primary margins at US$50/ton

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

NP - Primary Margin/ton (US$)

intervals shows that FATIMA makes our Buy list even at US$200/ton primary margin last
seen in CY07, making it an unlikely scenario in our view.

600

500
400

NP Primary Margins
were lower in this
period due to DAP
subsidy by GoP.

Sensi vity of CY12F EPS and TP with NP primary margin


NP Primary Margins/ton (US$)
Target Price

300

CY12F EPS

+US$50

Base Case

US$50

US$100

US$150

450

400

350

300

250

200

44.12

41.52

38.71

36.20

33.46

30.80

2.93

2.74

2.56

2.37

2.18

2.00

200

US$200

Source: AKD Research

100

CY11

CY10

CY09

CY08

CY07

CY06

CY05

CY04

CY03

CY02

CY01

Source: NFDC, Bloomberg & AKD Research

The market is valuing FATIMA at our worst case scenario, under apprecia ng the outlook for
stronger primary NP margins and higher o-takes for non-conven onal fer lizers, which
leads to a target price of PkR23.56/share. Our worst case scenario assumes NP and CAN sales
at 30% of capacity with NP primary margins falling to US$350/ton. In our worst case scenario,
we carry our base case assump ons for urea sales and 7% p.a. price increase for Urea and
CAN.
Worst case scenario
Worst Case Scenario with Target Price of PkR23.56

Current share price implies that market is valuing FATIMA at our worst
case scenario

CY12F

CY13F

CY14F

CY15F

CAN Sales as %age of Capacity

30%

30%

30%

30%

NP Sales as %age of Capacity

30%

30%

30%

30%

Annual increase in Urea and CAN prices


NP Primary Margin/ton (US$)
EPS (PkR)

7%

7%

7%

7%

350.00

350.00

350.00

350.00

1.53

2.64

3.14

3.62

Source: AKD Research

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Leverage to Decline

Reducing Debt Ratio

Currently, FATIMA is opera ng at a high leverage with es mated D/A ra o of 51% as at


CY11E. However, debt ra o is expected to fall sharply by cumula ve repayment of long term
debt of ~PkR10bn by the end of CY13F. We expect that debt servicing will not be problem
for FATIMA, in view of strong free cash flow genera on.

60%
50%
40%

FCFF vs. Debt Service Cost (PkRmn)

30%
30,000

20%

CY21F

CY20F

CY19F

CY18F

CY17F

CY16F

CY15F

CY14F

20,000

CY13F

0%

CY12F

25,000

CY11E

10%

15,000
10,000

Source: AKD Research


5,000
CY12

CY13

CY14

CY15

CY16

CY17

Debt Service Cost

CY18

CY19

CY20

CY21

CY22

Free Cash Flow to Firm

Source: AKD Research

Conversion/Redemp on of Preference Shares


FATIMA has paid up capital of PkR24bn (2bn ordinary shares of PkR10 each and 0.4bn preference shares of PkR 10/each). On Mar 1312, FATIMA provided redemp on no ce of 200mn
preference shares (valued at PkR2bn) at par value of PkR10/share, which will result in an
ou low of PkR2bn on May 1112. On the same date, preference shareholders (accoun ng for
50% of value i.e. PkR2bn) provided wri en no ce to convert their preference shares into
ordinary shares. Preference shareholders have oered the conversion to take place at higher
of PkR20/share or 20% discount to 60 days weighted average price a er the date of conversion no ce. Assuming conversion takes place at PkR20/share, number of ordinary shares
increases to 2.1bn on May 1112, bringing preference shares to nil.
Dilu on eect of preference share conversion into ordinary shares
Conversion price (PkR/share)

20.00

New number of Ord. shares (mn)


CY12F EPS a er conversion of pref. shares
(PkR)
CY12F EPS @2,000mn shares (PkR)
Dilu on eect of conversion

21.00

22.00

23.00

24.00

25.00

2,100

2,095

2,091

2,087

2,083

2,080

2.74

2.75

2.76

2.76

2.77

2.77

2.88

2.88

2.88

2.88

2.88

2.88

4.76%

-4.55%

-4.35%

-4.17%

-4.00%

-3.85%

Source: AKD Research

Valua ons & Investment Perspec ve


DCF Based Valua on
We have used DCF to value FATIMA at PkR41.52/share. We have assumed Beta of 1.25 (due
to higher risk associated with produc on of CAN, unconven onal product suite and higher
leverage) and risk premium of 6% to arrive at 19.5% cost of equity.
Target Price Sensi vity
Discount Rate (Cost of Equity)
2.00%
3.00%
Terminal
4.00%
Growth Rate
5.00%
6.00%

18.5%
43.38
44.12
44.97
45.95
47.08

19.5%
40.91
41.52
42.21
43.00
43.90

20.5%
38.71
39.22
39.79
40.43
41.16

21.5%
36.74
37.17
37.64
38.16
38.76

Source: AKD Research

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Breakup Target Price

Breakup of target price


Value (PkR/share)
7.50
0.38
33.64
41.52

Deferred taxa on
CERs
Core opera ons
Target price

18%

1%

% TP
18%
1%
81%
100%
Source: AKD Research

Deferred taxation
CERs

81%

Core operations

Source: AKD Research

DDM Based Valua on


By announcing a final cash dividend of PkR1.5/share (73% payout), FATIMA has joined the
high dividend payout norm of the fer lizer sector. Given the natural short cash cycle and
FATIMAs deferred taxa on, FATIMA should maintain high dividend payouts, in our view. Our
DDM based valua on prices the scrip at PkR39.27/share, implying an upside poten al of 66%
from current levels.

80.6%

7.00

7.75
8.68
80.8%

CY17F
DPS

8.00
9.60

8.75
9.36

8.00
8.65

7.25
7.97

CY16F
EPS

79.2%

CY15F

98.9%

CY14F

101.2%

100.9%

CY13F

100.4%

99.7%

CY12F

99.0%

6.50
7.32

5.75
6.44

5.00
5.77
100.7%

4.97
2.74
100.2%
2.75

We project a higher dividend payout


ra o by FATIMA going forward due to
availability of cash.

9.25
10.10

Forecasted dividend stream (PkR)

CY18F

CY19F

CY20F

CY21F

CY22F

Dividend payout
Source: AKD Research

Peer Group Comparison:


With FATIMA expected to enjoy rapid earnings growth going forward (CAGR: 34%), the only
poten al rela ve valua on parameter is PEG where it is currently ranked a er Engro. However, even the PEG ra o ignores deferred taxa on advantages a ached to FATIMA. Scrip is
a rac ve on CY12 P/B, PEG and DY rela ve to the industry averages. Premium PER on CY12
earnings is tradable for solid growth outlook in our view.

FATIMA Beats peers on growth


Sector Average PE(x) & Div. Yield
9.00
8.00

CY13 P/E(x)

7.00

Company

FFC

6.00

Sector Average

5.00

FFBL

4.00

FATIMA

3.00

ENGRO

2.00
1.00
0%

5%

10%

15%

CY12 Dividend Yield (%)

FATIMA

FFC

FFBL

Current Price (PkR)

23.43

124.84

41.57

99.28

Target Price (PkR)

41.52

144.88

49.31

173.84

Upside Poten al (%)

77%

16%

19%

75%

CY12 P/E (x)

8.54

7.66

5.81

4.23

CY13 P/E (x)

4.72

7.64

6.08

3.46

CY12 P/B (x)

1.74

7.17

3.04

1.05

CY12 PEG

0.26

2.40

46.10

0.20

CY12 Dividend Yield (%)

12%

13%

20%

Source: AKD Research

We have not incorporated debo lenecking in our projec ons. If it happens, it will upli our DCF based TP by
PkR3.26/share

ENGRO

17%
6%
Source: AKD Research

Debo lenecking of Ammonia Plant


Management of FATIMA is expec ng to achieve the desired debo lenecking of ammonia
plant by the end of Sep12 taking ammonia capacity u liza on to 120% of nameplate capacity. Assuming higher ammonia produc on, we have provided a revised schedule of our capacity u liza on rates below which increase by 3%-8%. This assumes FATIMA will end up with
excess ammonia produc on. Revised product line capacity schedule raises our DCF based
target price to PkR44.78/share, up PkR3.26/share from base case. That said, we con nue to
remain conserva ve and have not incorporated debo lenecking of the Ammonia Plant in our
es mates.

10

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Sales as %age of Capacity if debo lenecking happens


Products

CY11 A

CY12 F

CY13 F

CY14 F

CY15 F

CY16 F

Urea

88.41

74.00

98.00

98.00

98.00

98.00

CAN

85.25

60.00

90.00

90.00

90.00

90.00

NP

30.02

45.00

60.00

60.00

60.00
60.00
Source: AKD Research

Risks to Thesis:
Glut of Imported Urea: The GoP may con nue to provide imported urea at lower rates relave to local manufacturers. That said, we believe this risk has a limited me impact with the
recent hike in interna onal urea prices. Interna onal urea prices have gained 8% CYTD and
are unlike to come-o sharply as interna onal oil prices remain firm and China places higher
export taris during peak demand period.

Decrease in Urea Price: If GoP assures Sui based plants of consistent supply of natural gas,
the key risk is that Sui based companies may decrease price of urea in exchange. Impact of
decrease in retail urea price per bag by PkR100 on CY12 EPS and TP is PkR0.29 and PkR3.90/
share, respec vely.

Gas Curtailment: As FATIMA is based on the Mari network which has rela vely lower gas
curtailment compared to Sui, any change in priority to direct gas supplies to the power or
other value added sectors can pose a threat to the company.

11

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

Appendix
Recent Developments:

FATIMA

has obtained a phosphate


mine in Abbo abad on lease. The
mine will be opera onal in CY13CY14, according to management.
When the mine will be opera onal, it
will par ally ensure secure supply of
phosphate to FATIMA..

Financial Regulatory Authority

(FINRA) of USA has approved The


Bank of America-Merrill Lynch to act
as Market-Maker for FATIMA for
its Level 1 American Depository Receipts (ADR) program.

Fatima Fertilizer Company Profile


Management: Fa ma Fer lizer Company is a project of the Arif Habib Corpora on and Fa ma Group. Management has a wide range of experience, spreading from brokerage, trading
to manufacturing. Managements experience of running Pak Arab Fer lizer Company provides opera onal exper se and marke ng synergies to FATIMA. FATIMA was incorporated
on Dec 2403 while it was listed on all stock exchanges of Pakistan a er comple on of IPO in
Feb 10.

Pa ern of Shareholding: FATIMA has paid up capital of PkR24bn (2bn ordinary shares of
PkR10 each and 0.4bn preference shares of PkR 10/each). On Mar 1312, FATIMA provided
redemp on no ce of 200mn preference shares (valued at PkR2bn) at par value of PkR10/
share, which will result in an ou low of PkR2bn on May 1112. On the same date, preference
shareholders (accoun ng for 50% of value i.e. PkR2bn) provided wri en no ce to convert
their preference shares into ordinary shares. Preference shareholders have oered the conversion to take place at higher of PkR20/share or 20% discount to 60 days weighted average
price a er the date of conversion no ce. Assuming conversion takes place at PkR20/share,
number of ordinary shares increases to 2.1bn on May 1112, bringing preference shares to
nil.
Shareholding structure as at Dec 3111

Directors/CEO
& their spouses
21%

Others/Free
float
12%

Directors/CEO & their


spouses
Associated Companies and
related parties
Others/Free float

Associated
Companies and
related parties
67%

Source: Company Reports & AKD Research

FATIMA Group

ARIF HABIB Group

-Pak Arab Fer lizer

-Pak Arab Fer lizer

-Reliance Weaving Mills Limited

-Arif Habib Limited (AHL)

-Fa ma Sugar Mills Limited

-Arif Habib DMCC (AHD)


-SKM Lanka Holdings (Private) Limited (SKML)

-Reliance Commodi es (Pvt) Limited

-Al-Abbas Cement Industries Limited (AACIL)

-Fa ma Energy Limited

-Sachal Energy Development (Private) Limited (SEDPL)

-Pakistan Mining Company (Pvt) Limited

-Crescent Tex le Mills Limited (CTML)

-Fa ma Trading Co (Pvt) Limited

-Sweetwater Dairies Pakistan (Private) Limited (SDPL)

-Fazal Cloth Mills Limited

-Aisha Steel Mills Limited (ASML

-Air One (Pvt) Limited

-Rozgar Microfinance Bank Limited (RMFBL)

-Farrukh Trading Co (Pvt) Limited

-Tha a Cement Company Limited (THCCL)

FATIMA Fer lizer Company


Source: Company Websites

12

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

FATIMA: Annual Databank


Valua on Sta s cs:
Year End Dec 31
EPS (PkR)
EPS growth
PER (x)
ROE (%)
ROA (%)
BVS (PkR)
P/BVS (x)
FCFE/S (PkR)
P/FCFE (x)
CFS (PkR)
P/CFS (x)
DPS (PkR)
Dividend yield (%)
Payout Ra o (%)
EV / EBITDA
Sales Growth (%)
Gross Margin (%)
EBITDA Margin (%)
Net Margin (%)

CY11E/A
2.06
N/A
11.38
14.85
5.43
13.20
1.77
0.35
66.80
445
0.05
1.50
6.40
72.87
8.72
N/A
67.77
68.58
27.75

CY12F
2.74
33.27
8.54
20.42
7.59
13.44
1.74
0.88
26.64
700
0.03
2.75
11.74
100.24
4.57
66.52
63.43
68.99
23.32

CY13F
4.97
81.05
4.72
31.73
13.46
15.65
1.50
5.33
4.40
959
0.02
5.00
21.34
100.67
2.97
38.34
66.60
69.16
30.53

CY14F
5.77
16.08
4.06
35.11
15.15
16.42
1.43
6.92
3.39
1,059
0.02
5.75
24.54
99.73
2.42
7.82
66.51
68.62
32.86

CY15F
6.44
11.68
3.64
37.64
16.17
17.11
1.37
8.22
2.85
1,124
0.02
6.50
27.74
100.94
1.90
7.84
66.21
67.90
34.04

Source: Company Reports & AKD Research

Income Statement
(In PkR mn)
Net sales
COGS
Gross Profit
S&A Exp.
EBITDA
Other Income
Other Charges
Financial Charges
NPBT
Tax
NPAT

CY11A
14,833
4,781
10,052
715
10,172
134
320
3,063
6,088
1,971
4,117

CY12F
24,701
9,033
15,667
1,436
17,042
388
462
5,379
8,778
3,064
5,761

CY13F
34,170
11,414
22,756
1,967
23,631
573
833
4,700
15,829
5,534
10,431

CY14F
36,844
12,338
24,506
2,101
25,282
898
968
3,936
18,399
6,433
12,108

CY15F
39,733
13,426
26,306
2,245
26,978
1,382
1,679
3,200
20,564
7,190
13,523

Source: Company Reports & AKD Research

Balance Sheet
(In PkR mn)
Long Term Assets
Current Assets
Total Assets
Long Term Liabili es
Current Liabili es
Total Liabili es
Share Holders' Equity
Total Liabili es & Equity

CY11E
68,613
7,235
75,847
36,673
11,446
48,120
27,728
75,847

CY12F
66,504
9,373
75,877
33,201
14,458
47,658
28,219
75,877

CY13F
64,447
13,017
77,464
33,353
11,237
44,590
32,874
77,464

CY14F
62,450
17,453
79,903
34,735
10,685
45,420
34,482
79,903

CY15F
60,518
23,117
83,635
37,307
10,398
47,705
35,931
83,635

Source: Company Reports & AKD Research

Cash Flow Statement


(In PkR mn)

CY11E

CY12F

CY13F

CY14F

CY15F

CF from opera ons

10,433

16,395

22,459

24,819

26,328

CF from inves ng ac vi es

-4,297

-702

-785

-880

-985

CF from financing ac vi es

-3,190

-14,145

-18,963

-19,908

-20,148

2,946

1,547

2,711

4,031

5,195

283

3,229

4,777

7,487

11,519

3,229

4,777

7,487

11,519

16,714

Net chg. In cash & equiv.


Cash & Equiv. At beg. of the year
Cash & Equiv. At end of the period

Source: Company Reports & AKD Research

13

AKD Securities Limited


April 6, 2012

Fatima Fertilizer Company

AKD SECURITIES LIMITED

Member: Karachi Stock Exchange


PAKISTAN

Analyst Certification
I, Naeem Javid, hereby certify that the views expressed in this research
report accurately reflect my personal views about the subject securities and
issuers. I also certify that no part of my compensation was, is/or will be,
directly or indirectly, related to the specific recommendations or views
expressed in this research report. I further certify that I do not have any
beneficial holding of the specific securities that I have recommendations on
in this report.

Ratings Definitions
Buy

> 20% upside poten al

Accumulate

> 5% to < 20% upside poten al

Neutral

< 5% to < -5% poten al

Reduce

< 5% to < -20% downside poten al

Sell

< -20% downside poten al

Disclosures & Disclaimers


This publication/communication or any portion hereof may not be reprinted, sold or redistributed without the written consent of AKD Securities Limited. AKD Securities Limited has produced this
report for private circulation to professional and institutional clients only. The information, opinions and estimates herein are not directed at, or intended for distribution to or use by, any person or
entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject AKD Securities Limited to any additional registration or licensing requirement within such
jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable and complied by our research department in good faith. Such information has
not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of AKD Securities Limited at the date of this publication/ communication and are subject to change at any time without notice.
This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is for information purposes only and is not intended to provide professional, investment or any
other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in
this publication/communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Neither AKD Securities Limited nor any of
its affiliates or any other person connected with the company accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained
therein.
Subject to any applicable laws and regulations, AKD Securities Limited, its affiliates or group companies or individuals connected with AKD Securities Limited may have used the information
contained herein before publication and may have positions in, may from time to time purchase or sell or have a material interest in any of the securities mentioned or related securities or may
currently or in future have or have had a relationship with, or may provide or have provided investment banking, capital markets and/or other services to, the entities referred to herein, their
advisors and/or any other connected parties.
AKD Securities Limited (the company) or persons connected with it may from time to time have an investment banking or other relationship, including but not limited to, the participation or investment in commercial banking transaction (including loans) with some or all of the issuers mentioned therein, either for their own account or the account of their customers. Persons connected with
the company may provide corporate finance and other services to the issuer of the securities mentioned herein, including the issuance of options on securities mentioned herein or any related
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This document is being distributed in the United State solely to "major institutional investors" as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934, and may not be furnished
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The securities discussed in this report may not be eligible for sale in some states in the U.S. or in some countries.
Any recipient, other than a U.S. recipient that wishes further information should contact the company.
This report may not be reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose.

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