FFBL: GIDC holds the key
- We revisit our investment case on Fauji Fertilizer Bin Qasim Ltd (FFBL), stress-testing our numbers for potential downside risks. FFBL’s standalone losses during 9MCY19 increased to PkR2.4bn (LPS: PkR2.59), much higher than PkR203mn (LPS: PkR0.22) in SPLY, led by: (i) 522 bps YoY decline in gross margins, (ii) 2.3xYoY higher finance cost and, lastly (iii) effective tax rate of 86%, vs. 57% in 9MCY18.
- Our base case incorporates lower GIDC rates by PkR150/75 per mmbtu for feed/fuel (in line with the now sub-judice Presidential Ordinance regarding GIDC and consequent lower urea price at PkR1800/bag. FFBL would stand a major beneficiary in this regard given substantial improved PMs on DAP with a resultant TP of PkR31.3/sh.
- On the flip side, however, newsflow today indicates the GoP has framed the GIDC Levy, Collection and Implementation rules, which if implemented in tandem with gas infrastructure projects, may potentially strengthen the GoP’s case for GIDC—a bear case for Ferts. Assuming continuity of current GIDC rates in this scenario, FFBL stands to be the most adversely impacted given lower DAP PMs.
- In the above context, assuming (i) 20% YoY decline in urea offtake, coupled with 10% YoY higher DAP offtake for CY19, with slight improvement thereon, (ii) current urea price and gas/GIDC rates and, (iii) reduction in policy rate by 100 bps over CY20F, FFBL shall continue to post losses on standalone basis over our investment horizon (bear case TP: PkR18/sh).
- If FFBL offloads its existing stakes in cash-draining FFL (51%) and FML (83.33%), the cash inflow could assist FFBL in deleveraging, and transpire into PkR1.85/sh positive EPS impact (assuming a transaction price as per book value). However, lower GIDC rates would remain crucial for standalone profitability over our investment horizon.
AKD Research
Fauji Fertilizer Bin Qasim Limited is a Pakistan-based holding company. The Company manufactures, purchases and markets fertilizers. It is involved in meat, dairy and coal based energy generation sectors. It has identified its potential business segments and has undertaken investments in the areas of food, financial, power sector and wind energy projects. Its products include Granular Urea, such as Sona Urea, and Di Ammonium Phosphate (DAP), such as Sona DAP. Sona Urea is a synthetic organic compound containing nitrogen in amide form available in the form of white solid prills. It is applied to soil and also suitable in solution form as spray application. Sona DAP contains nutrient element, phosphorous besides nitrogen available in flowing granular form Granules are stronger, harder and of uniform size. It is suitable for various crops and soils recommended for initial application. It produces over 791,260 metric tons (MT) of DAP and approximately 433,610 MT of Urea.
AKD Securities Ltd. is one of the leading securities firm in Pakistan, providing a comprehensive range of investor focused services, including equity brokerage, economic and securities research, investment banking and financial advisory services. AKD Securities accounts for more than 6% of the average daily value of the Karachi Stock Exchange. AKD Securities was the first brokerage house to launch an online trading platform in Pakistan in November 2002 and now has the largest market share with over 6000 customers. This has helped diversify and expand the retail investor base in the country and ushered in a whole new universe of investors to the stock market.
AKD Securities Ltd. caters to a diversified group of domestic and international institutional investors, high net worth individuals and upscale retail clients, including expatriate Pakistanis. With high quality research, unparalleled execution and distribution capability for both regular and large block trades, AKD Securities Ltd. has earned an outstanding reputation in the Pakistani securities industry.Outside of commercial banks, AKD Securities Ltd. is one of the biggest capital market firms in the country. AKD Securities is the leader in raising and providing risk capital in underwriting, market making and mergers and acquisitions in Pakistan. Good corporate governance and professionalism are emphasized throughout the firm and AKD Securities Ltd. is amongst the very few companies to have introduced a firm-wide comprehensive CODE of ETHICS, overseen by an independent compliance manager.Ultimately, our success is based on the quality of service we provide to our customers and the trust and confidence reposed in us by them. Our focus, therefore, remains on customer satisfaction at all levels in the company.
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