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Karachi, December 04, 2013 (PPI-OT): AKD Securities expects FFBL to post a strong 38%YoY earnings growth in CY13 (EPS: PkR6.4) on the back of 13%YoY higher DAP production during the year, where the management target of 725k tons for the year is 75k tons higher than the company’s design capacity of 650k tons.
According to AKD Securities, however, risks to AKD Securities’ estimates arise from the government’s decision on the duration of winter gas load management, where a complete suspension of gas in Dec’13 wipes off AKD Securities’ CY13 earnings estimates for the company by 11%. Risks to future earnings also arise from the proposed gas tariff rationalization, where every PkR100/mmbtu increase in feedstock tariff results in a PkR110/bag cost hike for urea and PkR40/bag for DAP. While FFBL’s stock price has gained 9x% in 4QCY13TD, it still trades at a discount to peer CY13F P/E of 7.0x. At current levels, FFBL provides upside of 18% to AKD Securities’ TP of PkR49/share with a CY14F D/Y of 13.8%. Accumulate!
Strong DAP off take to drive 4QCY13 earnings: According to channel checks, FFBL’s DAP off take in Nov’13 stood at a strong ~150k tons, cumulative DAP off take in 11MCY13 to 712k tons, a growth of 34%YoY. Moreover, management targets total DAP production in CY13 at 725k tons (given stable gas supply in Dec’13), which is 13%YoY higher.
This is 75k tons above the company’s design capacity of 650k tons, where the company’s average monthly DAP production during 11MCY13 stood at 61.4k tons, compared to 53.7k tons in CY12, while DAP PMs are expected to average at US$274/ton in CY13F (up by 11%YoY). Based on AKD Securities’ full year respective DAP and urea off take estimates of 762k tons and 220k tons, AKD Securities expects FFBL to post NPAT of PkR5,981mn (EPS: PkR6.40), a growth of 38%YoY.
Risks still in place: News reports suggest the government is still over the duration of winter gas load management, where some reports indicate gas supply cut to the fertilizer sector (Sui network) for three (Dec’13-Feb’13), as compared to the usual curtailment of two months.
While AKD Securities has assumed continued gas supply for FFBL (at 50%) in Dec’13, suspension of supply in Dec’13 would reduce AKD Securities’ EPS estimate for CY13 by 11% to PkR5.7. Moreover, risks to future earnings also arise from the government’s proposed gas tariff rationalization program (expected in Jan’14), where every PkR100/mmbtu increase in feedstock rates increase results in a ~PkR110/bag cost hike for urea and PkR40/bag for DAP.
Diversification drive: After acquisition of AKBL (22% holding at a cost of PkR5.2bn) and announcement of the meat export venture, the company has continued with its diversification drive with investments planned in Foundation Wind Energy I (US$8.4mn) and Foundation Wind Energy II (US$6.3mn) over a period of two years.
While AKD Securities awaits details on these projects, AKD Securities highlights that the substantial investments are likely to continue clouding the company’s payout ability. Currently, AKD Securities has assumed payout ratios of 80% for the next three years as compared to last three year average payout ratio of 93%.
Investment Perspective: At current levels, FFBL trades at a CY13F P/E of 6.5x, which is at a discount to average peer CY13F P/E of 7.0x. While AKD Securities expects near-term gains on the stock on convergence to industry multiples, FFBL also provides an 18% upside to AKD Securities’ TP of PkR49/share and CY13F D/Y of 13.2%.