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Karachi: As expected Gas Infrastructure Development Cess (GIDC) has been imposed on fertilizers whereby feedstock prices for old fertilizer plants has been cumulatively raised by PkR211/mmbtu (including PkR197/mmbtu GIDC) to PkR313/mmbtu; however the new plants (ENVEN & FATIMA) have been exempted from gas cess application.
According to AKD Securities, similarly, fuel stock prices have also been escalated by 14% to PkR495/mmbtu. FFC initiates price hike for a change: Contrary to the recent trend, it has been FFC rather than ENGRO which has initiated the price hike this time, raising urea prices by PkR50/bag (net PkR43/bag), much lower than the increment in gas cost (est. at PkR254/bag). Even including last month’s urea price reversal of PkR100/bag, on a net basis fertilizer manufacturers on old plants are worse off by -PkR125/bag.
As for ENGRO, AKD Securities views the FFC price hike of only PkR50/bag as concerning given its high financial leverage compounded by uncertain outlook on gas supply to ENVEN and the fact that FFC’s price hike could potentially mean the price cap for urea.
Assuming ENVEN operates at 40% during CY12F, ENGRO’s cash breakeven urea price is estimated at PkR1,221/bag, however assuming zero ENVEN utilization, ENGROs cash breakeven price drives up to PkR1,756/bag, much higher than the current net urea price of PkR1,405/bag. Only FATIMA fertilizer seems to be the clear winner from the current situation as the company stands to benefit from higher urea price and uninterrupted gas supply.
However, the statement coming out of USA demanding a clamp down on Improvised Explosive Devises (IEDs) in exchange for US$700mn in aid is a sentiment downer, where it is feared that CAN fertilizer is used in IED’s. Below AKD Securities has provided AKD Securities’ EPS estimates for the fertilizer cluster following the gas price hike and annual urea price of -PkR1,460/bag.
Cement industry earning on Carbon credits
Luck Cement Limited has managed to substantially reduce carbon emissions through the installation of its Waste Heat Recovery Project. For this reason, the company has qualified for Clean Development Mechanism under the Kyoto Protocol of the United Nations and has earned its carbon credits called the Certified Emission Reduction (CER) credits. One CER is equivalent to one metric ton of CO2 emissions and the company expects an annual CO2 reduction of 79,918 metric tons.
While carbon credits can be traded, given the prevailing market price of Euro 4.22, AKD Securities expects an additional FY13F EPS impact of PkR0.11 for LUCK. DGKC, on the other hand, is currently working on obtaining the credits and as per AKD Securities’ discussion with the management, should obtain the registration by Mar’12. In addition to this, the list of items approved to be imported from India in the run-up to MFN includes fly ash for cement industry. Recall that Diamer Bhasha is the first concrete dam of Pakistan and will need a considerable amount of fly ash to be mixed with ordinary cement. Another news flow circling the industry includes the increase in gas prices by -14% for cement industry.
While the pass on should be marginal, AKD Securities expects cement manufacturers to announce the price increase by the end of this week. At current price levels, AKD Securities has a Buy stance on LUCK (FY12F PER: 4.8x) and DGKC (FY12F PER: 8.9x), offering respective upsides of 51% and 78% to AKD Securities’ target prices of PkR113/share and PkR34/share.