AKD Quotidian about — FFC: Moderate risks ahead

Karachi, November 20, 2013 (PPI-OT): Amid strong payouts maintained by FFC in 9MCY13 despite substantial investments made in AKBL and Al-Hamd Foods, a likely gas tariff revision in Jan’14 and a potential reversion of ENGRO’s Enven feedstock gas tariff to US$0.7/mmbtu spell risks to earnings going forward.

According to AKD Securities however, given improved pricing power of local players after a recent uptick in international urea prices and a low likelihood of any revision in Enven’s feedstock rates, in AKD Securities views, AKD Securities retains earnings estimates for FFC and maintain AKD Securities positives outlook. In 4QCY13, AKD Securities expects FFC to post NPAT of PkR5bn (EPS: PkR3.93), bringing cumulative CY13F NPAT to PkR19.9bn (EPS: PkR15.64).

FFC trades at a CY13F P/E of 6.9x and D/Y of 14%, which is substantially above the Bloomberg Global Leaders Fertilizers Index (BBGLF) D/Y of 3.7%. AKD Securities TP of PkR139/share for FFC implies upside potential of 28% from current levels.

Downplaying Risks: Amid strong urea demand in CY13, FFC has witnessed earnings growth of 8%YoY in 9MCY13 and has maintained a payout ratio of 96%, quelling concerns of reduced dividend payments due to investments in AKBL (PkR10.4bn) and Al-Hamd Foods (PkR385.5mn). Going forward, while AKD Securities remains optimistic on continued strong payouts, AKD Securities highlights moderate risk to FFC’s earnings viz gas price rationalization expected in Jan’14 and a potential reversion of ENGRO’s Enven feedstock gas tariff to US$0.7/mmbtu.

In this regard, every PkR100/mmbtu increase in feedstock gas rate for FFC results in a cost hike of PkR120/bag, where AKD Securities believes a recent uptick in international urea price (current premium to local price has increased to PkR376/bag) provides ample pricing power to local players to pass on the impact. Moreover, while AKD Securities attaches a low likelihood to Enven’s feedstock tariff reversion to US$0.7/mmbtu, a resultant urea price cut by ENGRO by up to PkR153/bag (Enven cost should reduce by PkR270/bag) could wipe off FFC’s CY14F earnings by 27%.

4QCY13 to remain strong: AKD Securities expects FFC to post NPAT of PkR5bn (EPS: PkR3.93) in 4QCY13 lower by 29%YoY largely due to lower dividend income from FFBL. This brings cumulative CY13F NPAT to PkR19.9bn (EPS: PkR15.64), a decline of 5%YoY. That said, FFC’s CY13F D/Y of 14% is still one of the highest in the AKD Universe and considerably above the Bloomberg Global Leaders Fertilizers Index (BBGLF) average D/Y of 3.7%.

Investment Perspective: At current levels, FFC trades at a CY13F P/E of6.9x and provides upside of 28% to AKD Securities TP of PkR139/share. In addition, diversification into other sectors such as commercial banks, food production and wind energy adds gloss to AKD Securities cases. In the near-term, any gas tariff revision to ENGRO’s Enven plant posits the key risk for FFC and AKD Securities awaits any decision by the ECC in this regard.

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