FFC_Defensive play in testing times, (AKD Daily, Mar 13, 2020)
FFC: Defensive play in testing times
- We review our investment case on Fauji Fertilizer Company Ltd (FFC) post release of detailed CY19 financial accounts, updating (i) urea price, bringing it down by PkR375/bag to current levels, (ii) urea production and offtake levels and, (iii) GIDC elimination on feed/fuel gas in our model.
- While the current urea price has neutralized the earnings impact for GIDC elimination for FFC, price differential of PkR215/bag between FFC and EFERT could lead to higher urea offtake for FFC. Note that FFC’s urea offtake declined 3%YoY to 2.46mn tons in CY19 vs. average 1% p.a. growth over the previous 5 years.
- Meanwhile, Supreme Court’s verdict on GIDC’s legality is awaited. An unfavorable decision could lead to the highest cash outflow (PkR61bn GIDC payables) amongst the listed fertilizer names (ST investments: PkR48bn as of Dec’19). On the flipside, a liquidation of ST investment for GIDC payables may bring the scrip on the shariah compliant investor’s radar, neutralizing negative repercussions for FFC.
- We have not incorporated any ‘other income’ being derived from GIDC accumulation in our CY20 estimates, thus any unfavorable decision and consequent liquidation of short term investment will have negative EPS impact of only PkR0.85. Our TP of PkR127 implies an upside of 32.1% and D/Y of 12.45% at last close – Buy.
AKD Research
Fauji Fertilizer is engaged in the manufacturing, purchasing and marketing of fertilizers including the investment in other fertilizer manufacturing operations. As of Dec 31 2004, Co. had a design capacity of 2,455,000 tonnes for urea production and 445,000 tonnes for DAP production.
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