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NOTORE CHEMICAL INDUSTRIES PLC - Initiation of Coverage: Well-positioned to capture fertilizer demand

We initiate coverage on Notore Chemical Industries PLC with a target price of ₦64.94. We derived our target price using a Discounted Cash Flow model based on earnings from its fertilizer business over a 2018-2023 forecast period (at current capacity). We are positive about the long-term earnings capacity of the business given the upside to Nigeria’s food production, its robust distribution framework and more importantly, control over its largest feedstock (natural gas) through a long-term Gas Supply & Purchase agreement with Eroton E&P in 2016, at a price lower than current market level.

Significant control over key feedstock

Gas is the most important feedstock in urea fertilizer production, accounting for over 80% of production costs. In 2016, Notore signed a Gas supply & purchase agreement with Eroton E&P Ltd. (Eroton) to ensure steady supply of gas to its plant. More importantly, the contract is priced at a level lower than current market price for gas. Supported by the favourable gas pricing, NOTORE is one of the lowest cost producers of fertilizer globally and margins are expected to further improve along with capacity utilization.

Robust distribution framework

The company’s distribution chain includes over 350 trucks operated by Transport partners (not NOTORE owned), over 70 Distribution Partners (DPs) with 130,000MT+ warehousing capacity who act as wholesalers to over 3,000 Retailers (Agro Dealers and Village Promoters). NOTORE is able to reach out to 4 million farming families across Nigeria via the framework. More importantly, the Village Promoters (VP) are trained by NOTORE’s Agricultural Service (AS) team via a VP training programme, and in turn, serve as NOTORE’s ambassadors in the rural communities; NOTORE has been able to train over two million farmers using the VP network.

Strong local fertilizer pricing

Due to limited domestic capacity, fertilizer demand in Nigeria has historically been met via imports (72% on average over the recent years). Although the entrance of a new player in 2016 significantly improved local urea supply, other types of fertilizers, which account for over 50% of fertilizer demand in Nigeria, are still met via import. As a result, the price of fertilizer in the local market is determined to a large extent by movements in global prices. Local fertilizer producers, including NOTORE, are the largest beneficiary of the strong imported fertilizer prices due to the production cost advantage they enjoy from relatively cheap pricing of their main feedstock (gas).