Morning Shout released by KASB Securities Limited and Economics Research

Karachi, July 27, 2012 (PPI-OT): FFC: Downgrade to Neutral on valuations

According to KASB Securities Limited,

• KASB Securities Limited downgrades FFC from Buy to Neutral on valuations. The stock is trading close to KASB Securities Limited’s PO of PRs120/share while a D/Y of 12% stops us from downgrading the stock to under-perform.

• KASB Securities Limited believes decline in earnings in 3Q12 should act as a near term dampener which will cause the stock price to under-perform in the near term.

• FFC has reported strong earnings growth of 67% QoQ (58% YoY) in 2Q12, taking 1H12 EPS to PRs8.12 (+26% YoY) driven by exceptional jump in urea sales during June due to time-bound price hike announcements.

• Revival of the industry’s pricing power and improved earnings outlook for FFBL can be the upside triggers for FFC going forward.

• Increase in cess within FY13, higher than expected urea imports and urea price cut by Engro on gas supply agreement would be the key downside risk to KASB Securities Limited’s estimates, in KASB Securities Limited’s view.

Downgrade to Neutral on valuations; 12% D/Y for 13E

KASB Securities Limited downgrades FFC from Buy to Neutral on a balanced risk reward profile in KASB Securities Limited’s view, where the stock is trading close to KASB Securities Limited’s PO of PRs120/sh. While the 2013E dividend yield of 12% stops us from downgrading to Under-perform, KASB Securities Limited does not find valuations at 7.3x 2013E EPS compelling enough to retain KASB Securities Limited’s Buy call. KASB Securities Limited considers strong 2Q12 earnings (up 58% YoY) as a short term catalyst that will cause FFC to underperform ahead of a weak earnings quarter in 3Q12.

Strong 2Q EPS will be followed by weaker 3Q12

FFC has reported strong earnings growth of 67% QoQ (58% YoY) in 2Q12, taking 1H12 EPS to PRs8.12 (+26% YoY) driven by exceptional jump in urea sales during June due to time-bound price hike announcements. KASB Securities Limited expects FFC to see QoQ earnings drop of 48% in 3Q12 to PRs2.66/share, due to decline in urea sales in Jul/Aug (pre-buying by dealers in June, imports arrival) and no cash payout by subsidiary, FFBL in 2Q12 (which would have been received in 3Q12).

Balanced risk/reward profile

1) Revival of local industry’s pricing power in 2013 and 2) Improved earnings outlook for FFBL can turn us positive on FFC. On the other hand, KASB Securities Limited sees downside risk to KASB Securities Limited’s estimates from 1) increase in cess on feed gas (16% impact in case of no pass through in urea prices), 2) aggressive urea imports by the govt. in 4Q12 (6% impact from 5% lower sales for FFC), and 3) urea price cut in event of gas supply commitment to Engro (6% downside from PRs50/bag cut).

Inching up estimates on recent urea price hike

KASB Securities Limited is tweaking KASB Securities Limited’s estimates by 1.7%/0.7% for 2013/2014E to account for the recent PRs20/bag price hike by the company and adjustment in KASB Securities Limited’s quarterly dividend income forecast from FFBL.