Diverse Portfolio of Products set to Benefit FATIMA

We are re-initiating our coverage on Fatima Fertilizer Company Limited (FATIMA) with a December 2018 target price of PKR 37.30, which gives an upside of 16.56% from its last closing price. The company has outperformed the index since the start of the year as a result of significant improvement in earnings for 1QCY18. The increase in its earnings was due to i) higher volumetric sales despite the production activity in Fatimafert (FATIMA’s wholly owned subsidiary) remaining suspended, ii) improvement in retention price post normalization of Urea inventory, and iii) decrease in finance cost by 33.81% YoY in 1QCY18.

Debt to equity ratio falls to 31.32% in 1QCY18

Over the years FATIMA’s debt to equity ratio has improved significantly from 116.75% in CY12 to 31.32% at the end of 1QCY18, which has resulted in significant decline in finance cost of the company. Going forward, we expect the company’s earnings to further improve on account of reduction in finance cost due to scheduled debt repayments.

FATIMA to benefit from low cost structure of NP compared to DAP

Another factor that contributes to improvement in earnings is increase in selling price of DAP as it allows the company to increase the price of Nitro Phosphate (NP) and thus increase the profitability of the product due to its low cost structure as compared to DAP. The selling price of NP is closely linked with price of DAP as it is considered a close substitute of DAP.

FATIMA’s gross margins continue to stand above its peers

FATIMA has the highest gross margins of around 57% compared to its peers’ average of around 30% in the industry due to concessionary gas tariff. The company is entitled to receive gas at concessionary tariff as per the fertilizer policy 2001 for a period of 10 years ending in June 2021. After this time, we expect the company’s margins to shrink. However, currently FATIMA stands immune to any hike in Feed Gas tariff for other manufacturers leading to hike in fertilizer prices. Along with receiving gas at concessionary rates, the company also faces lower gas curtailment, which provides prospects of sustained production.

TP of 37.30 offers an upside of 16.56%

Using Discounted Cash Flow (DCF) method, we have determined December 2018 target price of PKR 37.26 for the scrip. Our target price of PKR 37.30 implies an upside of 16.56% from its last closing price of PKR 32.00. Hence, we are adopting a positive stance on the stock.