AKD Quotidian about — FFC: CY12 Result Preview

Karachi, January 21, 2013 (PPI-OT): FFC will post its CY12 result on Jan 23’13.

According to AKD Securities expects FFC’s earnings to reduce by 8.1%YoY to PKR 20.7 billion (EPS: PKR 16.25) with lower dividend income from subsidiary FFBL (-43%YoY) as well as higher financial charges (+28%YoY) being the major drags. 4QCY12 earnings are forecast to bounce back strongly, rising sequentially by 69%QoQ to PKR 6.9 billion (EPS: PKR 5.41). Taking cue from subsidiary FFBL’s dividend payout, AKD Securities expects FFC to maintain it’s near 100% payout and announce a final cash dividend of PKR 5/share taking full year payout to PKR 15.50/share. FFC is currently trading at a CY13F P/E of 7.9x where the PIE ratio at a discount of 31% to the Bloomberg Global Leaders Fertilizers Index (BBGLF). AKD Securities currently has a Buy stance on FFC which offers 21% upside to AKD Securities’ Dec’13 TP of PKR 142/share.

CY12 earnings forecast to register 8.1%YoY lower: FFC will post its CY12 result on Jan 23’13. AKD Securities expects FFC’s earnings to clip 8.1%YoY lower to PKR 20.7 billion (EPS: PKR 16.25) with lower dividend income from subsidiary FFBL (-43%YoY) as well higher financial charges (+28%YoY) being the major drags. 4QCY12 earnings are forecast to bounce back strongly, rising sequentially by 69%QoQ to PKR 6.9 billion (EPS: PKR 5.41). Sequential earnings growth is fuelled by i) 25% growth in urea sales to 785k tons, following robust sales in Dec’12 which was helped by aggressive sales discounts as well as expectation of price hike in Jan’13 and ii) 66% growth in Other Income as FFBL’s 3QCY12 dividend will be reflected in FFCs 4QCY12 earnings (EPS impact of PKR 0.76). Taking cue from subsidiary FFBL’s dividend payout, AKD Securities expects FFC to maintain it’s near 100% payout and announce a final cash dividend of PKR 5/share taking full year payout to PKR 15.50/share.

Plenty of balance sheet space to lever up: According to FFC’s Sep’12 consolidated balance sheet, total debt to asset ratio stood at a comfortable ratio of 0.38x, allowing plenty of balance sheet space to lever up for potential AKBL share acquisition. Assuming an acquisition price of PKR 24/share, total value of 51% share-holding (Army Welfare Trust stake) is PKR 9.9 billion, while including the tender offer (50% of remaining shares), total transaction size could potentially go up to PKR 14.7 billion. Assuming FFC contributes 50% to the AKBL acquisition, the company will require a cash outflow of between PKR 4.93 billion – PKR 7.35 billion.

Where does FFC stand on a global basis? FFC is currently trading at CY13F P/E of 7.9x where the P/E ratio is at a discount of 31% to the Bloomberg Global Leaders Fertilizers Index (BBGLF). More importantly, FFC is most attractive on dividend yield basis where CY13 prospective yield is at 12.7% compared with dividend yield of just 3.2% for BBGLF. The BBGLF index is a market capitalization based index comprising of leading global fertilizer companies (43 in total), which includes FFC and ENGRO from Pakistan having respective weights of 0.2% and 0.5%. Based on actual performance from CY09-CY11, FFC’s gross margins have easily outstripped BBGLF, while the P/E discount has also narrowed (as high as 81% in CYO9) following robust profitability growth of FFC during the CY09- CY11 period. CY13TD, FFC has underperformed the BBGL index by4% as PKR volatility as well as political noise has resulted in FFC’s underperformance relative to BBGLF. Importantly, FFC has outperformed the BBGL index for three consecutive years (CY10-CY12) even on US$ adjusted returns.

Recommendation: AKD Securities has downward revised AKD Securities’ CY13F earnings by 3% to PKR 14.97/share after reducing AKD Securities’ urea sales for CY13 on account of lower carryover inventory from CY12 following robust urea offtake in Dec’12. AKD Securities currently has a Buy stance on FFC which offers 21% upside to AKD Securities’ Dec’13 IP of PKR 142/share.