AKD Quotidian about — FATIMA – Upside triggers in place

Karachi, July 09, 2013 (PPI-OT): Despite robust growth in fertilizer demand and impressive IQCYI3 results, FATIMA has remained a laggard in the KSE-100 Index’s ongoing bull-run.

According to AKD Securities trading at an attractive CY1 3F PIE of 6.4x, FATIMA remains one of AKD Securities tops picks in the AKD Universe, where AKD Securities expects price performance to catch up.

AKD Securities expects 2QCY13 earnings for the company to clock in 5%YoY higher at PkR2,273mn (EPS: PkRI.O8), and AKD Securities highlights near- term triggers such as a likely increase in urea prices during Aug’13 (post Ramzan) and possible increase in gas supply post re-allocation of 60mmcfd to fertilizer manufacturers to put FATIMA in the limelight.

In addition, after disputes over FATIMA’s planned investment in a nitrogen based fertilizer plant in USA, the issue has been largely resolved after the Posey County’s decision to support the investment, providing further clarity on the company’s expansion plans. At current levels. FATIMA provides an upside of 40% to AKD Securities TP of PkR36/share. Buy!

Possibility of additional gas: The government has announced re-allocation of 60mmcfd gas from the Guddu Power Plant to fertilizer manufacturers on the Marl network. In this regard, while the node of distribution of the additional gas among the manufacturers remains unclear, a division proportional to capacity seems likely in AKD Securities views.

This could potentially translate into an additional 1 2mmcfd of gas to FATIMA, providing room for enhanced utilization (currently at 84%). However, given capacity constraints on FATIMA’s ammonia plant (de-bottlenecking likely to complete in CY1 5), AKD Securities awaits GaPs decision to shed clarity.

2QCYI3 result preview: As per provisional off take numbers, FATIMAs 20CY13 of take for Urea, CAN and NP have clocked in lower by 25%YoY, 7%YoY and 1 2%YoY. The decline has come on the back of scheduled Annual Turn Around in Marl 3-Apr13 where production remained low.

AKD Securities expects the company to post NPAT of PkR2,273mn (EPS: PkR1.08) in 20CY13, an increase of 5%YoY owing mainly to a 4pptYoY increase in gross margin to 67%. On a sequential basis, 2QCY13F earnings are expected to be 35%QoQ higher primarily due to a substantial 51%QoQ expected increase in CAN off lake to -130k tons. This will bring 1HCY13 NPAT to PkR3,954 (EPS: PkR1 .88), an increase of 52%YoY.

Expansion into USA on track: Despite reservations by the State of Indiana to support setting up of a fertilizer plant by Midwest Fertilizers and FATIMA, the Posey County has issued US$1 .3bn worth of notes for the purpose.

While the investment has promising prospects given low natural gas prices in the US (currently 76% lower than its 10-year high), AKD Securities believes the venture may restrict payout capability of the company. In this regard, FATIMA is expected to invest US$ 150mn (PkR 15bn) in the project over a course of three years, where additional leveraging could possibly leave reduced room for payout.

However, AKD Securities maintains payout assumption of PkR2/share for CY13F and CY14F, providing D/Y of 8% for bath years until further guidance from management.

Investment Perspective: Trading at a CY13F and CY14F P/F of 6.4x and 5.2x respectively and with a 5-year earnings CAGR of 15%, FATIMA remains one AKD Securities tops picks in the AKD Universe.

While FATIMA has remained a laggard, underperforming the KSE-100 Index by 34% in CY13TD, AKD Securities sees a likely increase in urea prices in Aug’13 (post Ramzan) due to higher gas prices as a key trigger in the near term.

In this regard, AKD Securities estimates every PkR100/bag increase in urea price to result in a 3% increase in CY1 3F earnings. At current levels, FATIMA provides a robust upside of 40% to AKD Securities TP of PkR36/share. Buy!

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