FFC: Fertilizer business subduing upside potential; Neutral
- We upgrade FFC from Sell to Neutral with Dec’17 TP of PkR110/sh and revised EPS estimates of PkR9.76/10.48 for CY17/18F (DPS: PkR8.50/9.00). FFC’s high exposure to the weak Fertilizer sector is not adequately mitigated by burgeoning diversification ventures, in our view.
- FFC’s plans to participate with 30% stake in Thar Energy Limited – 330MW coal based power plant – is another step towards diversifying away from highly concentrated Fertilizer business. We have assumed FFC Energy – Wind Power Project to start contributing ~PkR0.40/sh in dividends from CY17F onwards.
- During CY16, FFC faced fertilizer business’ worst cycles due to capping maximum retail prices of Urea at PkR1400/bag, net decline in Urea retention margins, and increasing competition due to oversupply. Decline in dividend income from associates and increasing finance cost also contributed to the earnings decline of 18%YoY in CY16.
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.
Intermarket Securities Limited (IMS) is a full service corporate brokerage firm based in Karachi, Pakistan. We service both domestic and international clients. IMS was ranked #2 Best Local Brokerage and #3 Best for Overall Country Research for 2016 by AsiaMoney.
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