Thursday, February 16, 2012

Equity Research Pakistan

In Focus
Fertilizer Overweight
FATIMA - BUY TP Dec-12: PKR 36 Current Price: PKR 23
Farid Aliani farid@bmacapital.com
Stock Statistics
Ticker Mkt Cap 12M ADT Shares Outstanding USD mn mn shares mn FATIMA 504 3.6 2000

FATIMA: All Set to Go

We initiate our coverage of Fatima Fertilizer (FATIMA) with Dec12 target price of PKR36/share, representing a hefty 53% upside from current levels Hikes in urea prices (urea up 126% since Jan10) to compensate Sui based plants from production losses translates into straight bottom line impact for FATIMA. Given that Calcium Ammonium Nitrate (CAN) prices are directly linked to urea, CAN margins accordingly reflect the upside in urea prices Decline in debt would reduce the finance costs which will internally drive bottom-line growth going forward FATIMA deserves a BUY call with key value drivers stemming from stable gas supply, cheap gas rates, flexibility in production and inherent growth from reduction in leverage We initiate our coverage of Fatima Fertilizer (FATIMA) with Dec12 target price of PKR36/share, representing a hefty 53% upside from current levels. Thus, FATIMA deserves a BUY call with key value drivers stemming from:

1) Much less gas curtailment at Mari network and resultant windfall profitability, 2) Cheap feedstock gas price fixed at USD0.7/mmbtu for 10 years compared to
USD3.5/mmbtu for competitors on Mari network,

Stock Performance
1M Absolute % Relative to KSE % -1% -13% 3M -5% -7% 12M 93% 90%

3) Ability to dedicate resources to the most profitable fertilizer from its diversified
product portfolio and

4) Inherent growth story on account of declining finance cost as debt is repaid.

Price and Volume Graph
Volume mn(RHS) 32 26 20 14 8 May-11 Dec-11 Feb-11 Mar-11 Nov-11 Aug-11 Sep-11 Feb-12 Jun-11 Oct-11 Apr-11 Jul-11 Jan-12 Price PKR(LHS) 40 30 20 10 0

Gas Curtailment: Blessing rather than respite

FATIMA enjoys dedicated 110mmcft of gas allocation from Mari Network, which is facing significantly less gas curtailment of 7%-10% compared to Sui network (30%60% curtailment). Thus, subsequent hikes in urea prices (urea up 126% since Jan10) to compensate Sui based plants from production losses translates into straight bottom line impact for FATIMA. Given that Calcium Ammonium Nitrate (CAN) prices are directly linked to urea, CAN margins accordingly reflect the upside in urea prices. Therefore severe gas crisis in the country has been a blessing for the company rather than respite. We dont expect resolution of gas shortage in near to medium term, which will keep urea prices at these levels, we believe. We have assumed 7%-8% gas curtailment for FATIMA for CY12-13. As per fertilizer policy 2001, FATIMA and Engro Fertilizers new urea plant will continue to receive feedstock gas at USD0.7/mmbtu for 10 years (till 2021) compared to currently USD3.5/mmbtu prices for other fertilizer plants. The new plants also remained immune to Gas Infrastructure Development Surcharge (GIDS) imposed in the beginning of CY12. Thus urea prices were increased by PKR210/bag to compensate for the rise in feedstock gas cost. However with no incremental impact on gas cost for FATIMA, the company will realize this spike straight to its profitability.

FATIMA vs KSE100 Relative Index Chart

KSE100 Index FATIMA

240 200 160 120 80 May-11 Jul-11 Aug-11 Sep-11 Feb-11 Oct-11 Mar-11 Dec-11 Nov-11 Feb-12 Apr-11 Jun-11 Jan-12

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.

Thursday, February 16, 2012

Equity Research Pakistan

In Focus
Fertilizer Overweight

Sarsabz Urea: Evergreen Demand

Availability of ammonia (a processed product from gas) has remained the major concern for Pakistan, where despite having 6.9mn tons of capacity, the country imported 1.2mn tons of urea to feed the land. With meager gas curtailment to FATIMA along with informative marketing strategy and persistent gap in demand and supply, we believe the company will have all the space to sell its 0.5mn tons of urea. Urea being a high margin and easily sellable product, we believe the company will dedicate its curtailed ammonia to urea. Thus, we have modeled in 100% capacity utilization for urea for FATIMA and retail urea prices at PKR1,810/bag for CY12-CY14. The risk to our thesis is a potential downside in urea prices if Engros EnVen starts receiving gas for more then 5 to 6 months a year. This could stem from Sindh high court ruling in favor of Engro in its case against SNGPL.

CAN: All set to sell

Calcium Ammonium Nitrate (CAN) is considered to be a cheaper substitute for urea, and thus its prices are closely linked to urea prices. Pakistan has two CAN producers (Pak Arab Fertilizers and FATIMA) having capacities of 0.45mn and 0.42mn tons (total: 0.87mn tons) respectively. With growth emerging from informative marketing strategy by FATIMA, the entire market has shown a tremendous growth (CAGR of 49% since CY09) to 0.68mn tons. Considering the CAN market to remain stable at these levels, we have taken FATIMAs CAN offtakes at 290k-325ktpa for CY12-CY14. Our CAN price assumption stands at PKR200/bag average discount to urea prices. Key risk to our thesis is potential decline in urea prices, which will force CAN prices to move south. However, on account of political deliberations between Pakistan and the USA, we downplay the risk of halt in CAN production over concerns regarding its use in explosives.

NP: Highest margins but no uptick in volumes

NP is a balanced source of both nitrates and phosphates to soil, however, is considered a substitute for DAP in Pakistan. NP market has not shown any enthusiasm in terms of volume growth (5 yr CAGR -1%). However, with lower production from Pak Arab fertilizer due to gas curtailment, FATIMAs additional NP supply has been absorbed in the market. Under this scenario, we have assumed existing market share of ~50% for FATIMA with a nominal market growth assumed at 2%. However, NP prices being linked to DAP and resulting high margins, the contribution of NP to the FATIMAs top line would be approx. ~40% for CY12.

NPK: Plan shelved

FATIMA has delayed bringing NPK capacity online due to low gas availability and low demand in the market, thus we have assumed 0% NPK production for FATIMA in our model.

Debt: Retirement to drive growth

FATIMA carries over 38.8bn debt (as of Sep 30, 2011) on its balance sheet (Debt to Equity: 1.76) with repayments to start in CY12. The company will repay the debt in next seven years, with PKR5.0bn each to be repaid in CY12-CY13. Resultantly the decline in debt would reduce the finance costs which will internally drive bottom-line growth going forward. On account of all-time high urea prices we believe the cash generated from operations will be sufficient enough to meet debt obligations and dividend

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.

Thursday, February 16, 2012

Equity Research Pakistan

In Focus
Fertilizer Overweight

payments to shareholders. We estimate DPS of PKR2.0 from CY12 which will gradually increase going forward.

Outlook: BUY at Dec12 PER of 5.2x

FATIMA is attractively trading at Dec12 -13 PER of 4.7x-5.2x. We recommend a BUY on the stock with our Dec12 TP of PKR36/sh based on its value drivers of stable gas supply, cheap gas rates, flexibility in production and inherent growth from reduction in leverage. FATIMA: KEY ASSUMPTIONS
CY12 Capacity Utilization Urea CAN NP Gas Availability Ex Factory Prices (PKR/bag) Urea CAN NP Feedstock (PKR/mmbtu) Fuelstock (PKR/mmbtu) Phos Rock FOB (USD/ton) 1,543 1,371 2,239 60.67 494.86 165 1,543 1,371 2,172 60.67 509.71 150 1,543 1,371 2,277 60.67 525.00 150 100% 70% 47% 92% 100% 72% 48% 93% 100% 77% 49% 95% CY13 CY14

FATIMA: Projected Financials

PKR mn Sales Cost of sales Gross Profit Administrative Expenses Selling & Distribution Expenses Other operating expenses Other operating income Profit from operations Finance cost Profit Before Taxation Provision for taxation Net Profit After Taxation Profit per share basic PKR Profit per share diluted PKR Source: BMA Research CY12E 31,579 11,596 19,982 474 563 433 0 18,512 5,529 12,983 4,544 8,439 4.22 3.67 CY13E 31,692 11,903 19,789 494 599 461 173 18,408 4,730 13,678 4,787 8,890 4.45 3.86 CY14E 32,709 12,466 20,243 518 645 496 437 19,021 3,769 15,252 5,338 9,914 4.96 4.31

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.

Thursday, February 16, 2012

Equity Research Pakistan

In Focus
Fertilizer Overweight

Glossary
TP: Target Price EPS: Earning per share PER: Price to earnings ratio PBV: Price to Book ratio DY: Dividend Yield

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.