FFBL DETAIL REPORT

1
Recommendation
BUY, Hold

Fauji Fertilizer Bin Qasim Ltd. Valuation Report

Industry Overview
The fertilizer industry is an integral part of Pakistans economy. The Pakistani fertilizer industry
produces, imports and distributes various types of fertilizers. The principal raw material for the
manufacture of anhydrous ammonia, and therefore, fertilizers, is natural gas. In fact, fertilizer
industry is the second largest consumer of Pakistans total gas availability (26% for fertilizer
consumption vs. 33% in the case of energy). Natural gas used as feedstock, which is an essential
input in the production of ammonia, average roughly over 30% of fertilizer production costs and
around 75% of total gas requirement. Used additionally for fuel purposes (fuel stock), natural gas
generally accounts for over 55% of production costs. The following companies constitute the
fertilizer sector of Pakistan; Engro Fertilizer, Fatima Fertilizer, Fauji Fertilizer Bin Qasim Ltd.
and Fauji Fertilizer Company, having market share of 30%, 6%, 24% and 40% respectively.

Market Share

FFC
Engro Fertilizer
Fatima Fertilizer
FFBL

Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with
regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the departments
judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without
any legal responsibility.

FFBL DETAIL REPORT

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FFBL - Company Introduction

FFBL is a modern Granular Urea and Di-Ammonium Phosphate (DAP) fertilizers manufacturing complex,
built at a cost of US$ 468 million and located in eastern zone of Bin Qasim, Karachi. FFBL is the only
fertilizer complex in Pakistan producing DAP fertilizer and Granular Urea thus making significant
contribution towards agricultural growth of the country by meeting 45% of the demand of DAP and 13%
of Urea in domestic market. The major products of FFBL are Urea and DAP having an installed capacity
of 551,000 MT and 650,000 MT respectively. The major shareholders of FFBL are FFC (49.8%) and Fauji
Foundation (18.29%).

Factors Affecting the Company

Gas Curtailment

In 2014, the gas curtailment for FFBL increased by 3% to 41% resulting in a reduction in annual
production of Urea and Ammonia by 5% each as compared to last year. However, this reduced to 31% in
2015, that helped increase the production of both Urea and DAP. We are confident that the gas supply
for FFBL will improve in the near future; therefore, we have assumed average gas curtailment of 28% in
the upcoming years on the account of upcoming LNG project.

Improved DAP margins

With recently announced subsidy under the Kissan package at PKR500/bag of DAP, and stable
phosphoric acid prices at US$805/ton, FFBL has found some breathing space with improved DAP
margins.

Competition from International Markets

The international prices of Urea and DAP have declined by 5.5% and 11.6% respectively during the last
few days of the previous year. Whereas, in Pakistan, according to Pakistan Bureau of Statistics (FBS), the
prices of Urea and DAP have increased by 65% and 35% respectively. This will negatively affect the sales
of domestic fertilizer producers.

Government of Pakistan Support

Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with
regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the departments
judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without
any legal responsibility.

FFBL DETAIL REPORT

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The fertilizer sector has always enjoyed support from the Government of Pakistan in the form of
subsidized feed gas supply. Recently, however, pressure has arisen from the imposition of Gas
Infrastructure Development Cess (GIDC), prioritizing other sectors for gas allocation, and also due to the
recent increase in gas tariffs for feed and fuel stock. However, to meet such challenges FFBL has set up a
coal based power generation company by the name of FFBL Power Company Limited that will not only
cater for power and steam requirement of FFBL but will also supply electricity to K-Electric thereby
improving financial health of the company.

Diversification

FFBL has already made investments in Askari Bank Limited and Fauji Cement. The company continues on
its path of diversification and has taken a big leap forward with the incorporation of coal based power
generation company. This company will not only meet the requirement of FFBL but will also be able to
sell surplus electricity to K-Electric. The project will go a long way in fulfilling companys goal of
maintaining sustained growth and broadening its income base. FFBL is also making progress in its Meat
and Food projects. The company has shown interest in acquiring Noon Pakistan Limited, a dairy based
company.
FFBLs investment in Foundation Wind Energy power projects will bear fruit in 2015. Foundation Wind
Energy II has started its commercial production in Dec 2014, while Foundation Wind Energy I is
expected to start its commercial production in March 2015.

Assumptions

On the account of upcoming LNG project and the improvement in gas curtailment the company
experienced in 2015, we assumed gas problems for the company will improve and will remain at
28% in the coming years.

Due to higher DAP margins as compared to UREA margins, we assumed capacity utilization to be as
follows (and remain at this level); 75% for Urea and 110% for DAP.

Debt schedule is prepared in accordance with the companys plans of paying off their debt.

Investment in assets is assumed in line with average investment made during the last three years.

Inflation is calculated as an average of the last 5 years.

Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with
regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the departments
judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without
any legal responsibility.

FFBL DETAIL REPORT

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Dividend payout ratio is assumed to be 90%, calculated as an average of the payout ratios of the last
5 years.

Terminal growth rate is assumed to be 4.5%, in line with long-term GDP growth rate.

The required equity rate of return is calculated using the CAPM - Capital Asset Pricing Model.

Valuation Techniques
We have used two valuation techniques to derive the fair value of share price; Free Cashflow to Equity
Model and Dividend Discount Model.

Free Cashflow to Equity -- For this model;

We have assumed a long-term growth rate of 4.2% (in line with long-term GDP growth rate).

The discount rate used (10.6%) is calculated using the CAPM model; using a risk-free rate of 6%,
adjusted beta of 0.66 and market risk premium of 7%.

The terminal value is calculated as at the end of the year 2019, which is then discounted back to
present using the discount factor.

This PV of terminal value along with the total value of equity (derived by discounting the 5-year
forecasted free cash flow to equity using the discount factor of 10.6%) is then divided by the
number of shares to derive a value of Rs. 67/share.

TERMINAL VALUE
Long Term Growth Rate

EQUITY VALUATION
4.2% Total Value of Equity

FCFE at (T+1)

3,853,932

Terminal Value

60,030,091 Equity Value/Share

PV of Terminal Value

40,089,846

No. of Outstanding Shares

62,146,055
934,110,000
67

Dividend Discount Model For this model;

We have assumed a long-term dividend growth rate of 4.86% (calculated using the retention ratio
and the return on equity taken as an average of last 5 years).

Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with
regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the departments
judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without
any legal responsibility.

FFBL DETAIL REPORT

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Dividend payout ratio is assumed to be, and remain at, 90%, calculated as an average of the last 5
years.

Using the expected EPS & expected DPS for the year 2015, the growth rate and dividend payout
ratio, we have derived the value to be Rs. 60.95/share.

DIVIDEND DISCOUNT MODEL

Growth Rate
Dividend Payout Ratio

4.86%
90%

3-Quarter EPS
Forecasted EPS for Last Quarter
EPS
DPS
DDM = DO*(1+g)/ke-g

1.04
2.68
3.72
3.348
60.95

VALUE OF FFBL

60.95

Financial Highlights
FINANCIAL PERFORMANCE
Profitability Ratios
Gross profit ratio (%)
EBITDA Margin to Sales (%)
Operating Leverage Ratio
Net Profit To Sales
Return on Equity
Return On Capital Employed
Liquidity Ratios
Current Ratio
Quick/Acid test Ratio
Cash and Cash Equivalent to
current liabilities
Cashflow from operations to
sales
Activity / Turnover Ratios
Inventory Turnover
Inventory Turnover
Debtor`s Turnover

2014

2013

2012

2011

2010

%
%
%
%
%
%

22.43
17.14
0.25
8.12
30.73
17.41

26.65
21.01
0.28
10.65
45.15
43.18

23.92
20.18
3.65
9.06
34.57
31.48

36.00
33.28
2.14
19.27
78.96
63.80

31.12
27.59
2.59
15.06
53.35
40.46

Times
Times
Times

1.10
0.90
0.72

0.73
0.56
0.40

1.00
0.70
0.44

1.17
0.90
0.34

1.19
0.98
0.91

17.20

18.25

3.01

14.95

17.08

Times
Days
Times

28.55
13
32.21

13.30
27
26.74

8.80
42
11.67

15.29
24
31.03

23.86
15
56.87

Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with
regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the departments
judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without
any legal responsibility.

FFBL DETAIL REPORT

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Debtor`s turnover
Creditor`s Turnover
Creditor`s Turnover
Total Assets Turnover
Fixed Asst Turnover
Operating Cycle
Investment / Market Ratios
Earnings per share (Pre-Tax)
Earnings Per Share(After-tax)
Price earning Ratio
Dividend yield Ratio
Dividend payout ratio
Dividend cover ratio
Dividend per Share-intern
Dividend per Share-Proposed
Final
Market price per share
Year end
High During The year
Low during the year
Break up value

Days
Times
Days
Times
Times
Days

11
6.00
61
1.07
4.05
(37)

14
6.83
53
1.50
4.17
(12)

31
5.12
72
1.18
3.46
1

12
6.53
56
1.39
3.86
(20)

6
8.58
43
1.22
2.94
(22)

Rs
Rs
Times
%
%
%
Rs
Rs

6.19
4.30
10.51
8.85
93.03
107.49
1.75
2.25

9.14
6.21
7.06
11.41
83.19
124.14
2.75
2.25

6.93
4.65
8.31
11.66
96.77
103.26
2.25
2.25

17.31
11.53
3.68
23.57
86.73
115.30
6.50
3.50

10.37
6.97
5.13
18.33
93.97
106.41
3.05
3.50

Rs

45.21

43.81

38.59

42.43

35.73

Rs
Rs
Rs

46.33
37.20
13.99

46.65
36.70
13.75

50.88
35.30
13.44

63.67
35.08
14.60

38.65
25.08
13.07

Conclusion
On the basis of our valuations, FFBL currently appears undervalued. Its fair value appears to be
approximately Rs. 64/share taken as an average of the values derived from the two valuation models
used, 67 derived from FCFE model and 60.95 derived from dividend discount model. The Buy or Hold
strategy is recommended for this scrip for medium to long term investment.

Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with
regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the departments
judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without
any legal responsibility.

FFBL DETAIL REPORT

7

Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with
regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the departments
judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without
any legal responsibility.