Morning Call about Fauji Fertilizer Bin Qasim Limited – Arif Habib Limited

Karachi, June 22, 2012 (PPI-OT): Company becomes latest victim of gas curtailment

Gas diversion to power sector halts urea production

FFBL’s gas supply was curtailed from June 19, 2012, for which the company had to shut down its Urea plant, whereas its DAP plant continued to operate at capacity due to its lower gas requirements. Although no official word has thus far been received from the company, Arif Habib Limited’s industry checks suggest that the government has decided to curtail FFBL’s gas for 3 days on rotational basis; consequently the company’s gas will be fully restored by June 23, 2012, whereas urea plant will commence production after 24 hours of gas restoration.

According to Arif Habib Limited, clarity is yet to emerge on the duration of this rotational basis gas curtailment. Going by the gas supply outlook, Arif Habib Limited has conducted a sensitivity analysis for FFBL, with its urea plant operating at 50% capacity for the remainder of the year, taking total (urea) plant utilization for CY12 to 45%. DAP production meanwhile is expected to continue since it has a lower gas (pressure) requirement, and total capacity utilization in CY12 is assumed at 80%. In the event of gas being supplied on rotational basis continues for the rest of the year (with only urea production taking a hit), Arif Habib Limited estimates that FFBL’s earnings will be affected negatively by PKR 0.81/share.

The backdrop

The gas curtailment to FFBL comes at the heels of the decision made by GoP to conduct an energy-efficiency audit in order to provide gas to efficient units on a priority basis. It was also decided in the said meeting to divert 70mmcfd gas from FFBL to the Karachi Electric Supply Company (KESC) for generation of 350MW of electricity previously supplied to the entity by PEPCO. It is pertinent to mention here that fertilizer companies are not onboard with this audit plan on the basis of there being no such provision in the gas sales agreement that they have inked with gas companies. Under the audit program, the fertilizer plants operating at low capacity will be penalized and their share of gas will be reduced and diverted to the most efficient plants. Moreover, the gas supply companies have also been directed to conduct similar audits of captive power plants (CPPs) and independent power producers (IPPs).

Recommendation

From last closing price of PKR 40.4/share, the stock of FFBL offers an upside potential of 12.3% to Arif Habib Limited’s DCF based Dec-12 target price of PKR 45.3/share. Arif Habib Limited thus maintains Arif Habib Limited’s ‘Buy’ stance on the scrip. A CY12E PER and dividend yield of 6.2x and 15% respectively further sweeten the offering.