AKD Quotidian about — AKBL Rights = Cash Calls for FFC and FFBL

Karachi, July 24, 2013 (PPI-OT): Following a sweeping book cleaning exercise, AKBL has posted hefty loss of PkR4.68bn (LPS: PkR5.76) in 2QCY13, bringing 1HCYI3 NLAT to PkR4.11bn (LPS: PkR5.05). In tandem, AKBL has announced a 55% rights issue priced at par.

According to AKD Securities while the stock will likely remain under pressure in the immediate-term, AKD Securities sees positives going forward in that a stronger balance sheet may enable resumption of cash dividends by CY15/16. AKBL’s rights issue has ramifications for sponsors where AKD Securities estimates that this translates into a cash call of PkRI.5/share for FFC and PkR1.0/share for FFBL.

This may potentially reduce these fertilizer manufacturers’ CY13 dividends by a corresponding amount and thereby keep their share price performance suppressed in the near-term. That said, FFC and FFBL will still offer attractive forward dividend yields which should curtail any downside while providing fresh investors with attractive entry points within the backdrop of improving dynamics in the core fertilizer space.

Book Cleaning at AKBL: With new sponsors the Fauji Foundation (together with FFC and FFBL) evidently engaging in a sweeping book cleaning exercise, AKBL has posted a hefty loss in 2QCY1 3. Specifically, following loan provisions of PkRG.37bn in 2QCY13, AKBL has posted NLAT of PkR4.68bn (LPS: PkR5.76) in the previous quarter. As a result, IHCY13 NLAT comes to PkR4.11 bn (LPS: PkR5.05).

In tandem, AKBL has announced a 55% rights issue priced at par which is targeted to raise PkR4.47bn. In this regard, based on management projections, AKD Securities estimates that the bank’s CAR will inch up to more than 13.5% by end-CY16F vs. 11.9% in CY12 which can potentially enable resumption of cash dividends byCYl5/C16.

Even if the banks profitability falls short of management projections, a TEC rollover (PkR3bn worth of subordinated debt comes in for expiry this year) should still push up CAR to more than 13% by CY16F. As such, while the stock will understandably remain under pressure in the immediate-term, a stronger balance sheet should yield positives going forward.

AKBL CAR Projections based on:                CYI2A    CY13F  CYI4F  CYI5F CYI6F

 Management profitability projections (A)     11.9%    12.6%  131%   13.3%    137%
 (A)together with PkR3bnTFC rollover          11.9%     143%  14.7%  14.7%   15.0%
 50% discount to mgmt. projections (B)        11.9%     126%  12.6%   121%   11.8%
 (B)together with PkR3bn FEC rollover         11.9%     143%  14.1%  13.5%   13.1%

 Source: AKD Research

Implications for sponsors: Subscription to the rights issue of AKBL would represent a cash outflow of PkR1 ,927mn(PkR1 .52/share) for FEC and PkR966mn (PkR1 .03/share) for FFBL. In this regard, assuming both companies subscribe to the issue through their respective cash balances, AKD Securities believes the outflow will likely result in a clip in payouts.

AKD Securities highlights that any cut in dividends may potentially come alongside 2QCY13 results where AKD Securities earlier expected FFC to announce DPS of PkR3.5 and FFBL to announce DPS of PkR1 .75. Further, trimmed dividend expectations add to earlier expectations of a leaner payout this year on the back of the Fauji Group’s aggressive diversification drive (acquisition of AKBL; venturing into meat exports, food processing and potentially steel manufacturing).

That said, while share price performance nay remain suppressed in the near- term, AKD Securities would take any downside as a fresh entry point within the backdrop of improving core fertilizer dynamics. Following the potential clip in payout, AKD Securities respective TPs of PkR141/share and PkR52fshare for FFC and FFBL would still imply a Buy stance for the scrips.

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