The Bell about Chemicals – Elixir Securities Limited

Karachi, December 26, 2013 (PPI-OT): FFBL: Downgrade to hold on stellar price performance

Strong 4Q results likely… FFBL is expected to post DAP and urea sales of 340k tons (+38% YoY) and 18k tons (-78% YoY) respectively during 4QCY13.

According to Elixir Securities Limited, despite strong DAP off take, 4QCY13 EPS shall clock in at PKR2.61, up 10% YoY, owing to 26% YoY primary margin attrition. Elixir Securities Limited expects FFBL to announce final payout of PKR2.50/sh along with full year results, which shall lift CY13 DPS to PKR5.25/sh.

…but positives have been priced in: FFBL has posted strong return of 12% during Dec-13, outperforming KSE100 index by 7%, primarily due to strong full year result expectations. Elixir Securities Limited believes that these expectations have already been priced in and thus downgrade Elixir Securities Limited’s stance from BUY to HOLD. At current levels, FFBL offers CY14 dividend yield of 11% along with a downside of 7% to Elixir Securities Limited’s Jun-14 PT of PKR42/share.

Weak margin outlook strengthens Elixir Securities Limited’s investment case: DAP primary margin for FFBL during 4QCY13 is estimated at ~USD241/ton, down 26% YoY. Medium term outlook for international DAP prices remains bleak which would likely keep margins under pressure. Elixir Securities Limited has assumed slight recovery in CY14 and expect average DAP margin at USD247/ton with gradual attrition of 1% annually up to 2017.

Urea outlook remains bleak: FFBL’s urea production has consistently fallen between CY09-13. Utilization of urea capacity fell from 114% in CY09 to 44% during 9MCY13 due to gas curtailment. During 4QCY13, utilization of urea is expected to drop further to 13% and would thus limit CY13 urea utilization at 36%. Elixir Securities Limited believes that the situation would slightly improve after CY13 and have assumed 50% utilization over CY14-17.

Strong 4Q results likely…
FFBL’s volumetric DAP sales during Oct-13 and Nov-13 are estimated to have clocked in at 266k tons, 2.1x higher than its production during the same period last year. Elixir Securities Limited expects strong sales to continue during Dec-13 as the ongoing quarter normally witnesses peak fertilizer sales due to Rabi sowing season. Thus, FFBL is expected to post DAP and urea sales of 340k tons (+38% YoY) and 18k tons (-78% YoY) respectively during 4QCY13. Despite strong DAP off take, 4QCY13 EPS would clock in at PKR2.42, up a mere 2% YoY, owing to 29% YoY margin attrition. FFBL shall payout a final cash dividend of PKR2.25/sh along with full year results, which shall lift CY13 DPS to PKR5.0/sh.

but positives have been priced in
FFBL has posted stellar return of 12% during Dec-13, outperforming KSE100 index by 7% primarily due to strong full year result expectations. Elixir Securities Limited believes that these expectations have already been priced in and thus downgrade Elixir Securities Limited’s stance from BUY to HOLD. At current levels, FFBL offers CY14 dividend yield of 11% along with a downside of 7% to Elixir Securities Limited’s Jun-14 PT of PKR42/share.

Weak margin outlook strengthens Elixir Securities Limited’s investment case
DAP primary margin for FFBL during 4QCY13 is estimated at ~USD241/ton, down 26% YoY. Steep reduction in margins is primarily attributed to a 25% reduction in DAP prices (in USD terms). However, this has been partially offset by 16% correction in phosphoric acid prices. Medium term outlook for international DAP prices remains unexciting as 9% additional capacities would be added by 2015, with further capacity additions expected in Saudi Arabia and Morocco post- 2015. Moreover, these new capacities would be vertically integrated and shall be able to produce DAP at low cost, thus keeping international DAP prices in check. Bleak DAP outlook would likely keep margins under pressure. Elixir Securities Limited has assumed slight recovery in CY14 and expect average DAP margin at USD247/ton with gradual attrition of 1% annually up to 2017.

Urea outlook remains bleak
FFBL’s urea production has consistently fallen between CY09-13. Utilization of urea capacity fell from 114% in CY09 to 44% during 9MCY13 due to gas curtailment. Total gas supply provision to FFBL has fallen from 83mmscfd in CY09 to ~52mmscfd during 9MCY13. During 4QCY13, utilization of urea is expected to drop further to 13% and would thus limit CY13 urea utilization at 36%. Elixir Securities Limited believes situation would slightly improve in CY14 and have assumed 50% utilization over CY14-17.

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