AKD Quotidian about – Tender offer for AKBL-Key Considerations

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Karachi, March 07, 2013 (PPI-OT): The public announcement for AKBL shares has been made.

According to AKD Securities in this regard, FFC, FFBL and Fauji Foundation will be acquiring Army Welfare Trust’s (AWT) AKBL stake in the proportion of 60%, 30% and 10% respectively.

Including the impact of tender offer (174mn shares), the Fauji consortium will be purchasing 585mn shares of AKBL at a price of PKR24.3/share resulting in total transaction value of PkRI4.2bn.

FFC will be contributing PKR8.5bn (PkR6.llshare), FFBL PkR4.3bn (PkR4.51/share) and the remaining PkRI.4bn wilt be contributed by the Fauji Foundation.

Assuming Debt Equity ratio of 80:20 for the purchase, equity investment from FFC and FFBL will amount to PKRI.7bn and PkR853rnn respectively, which could potentially lower the CYI3F dividend by PkRI3/share for FFC and PkRO.9/share for FEBL.

Net earnings impact of AKBL acquisition (share of profit less funding cost) is estimated to be slightly positive for both FFC and FFBL assuming CY13F NPAT of PkRI.5bn for AKBL and a funding cost of 12.5% (KIBOR + 2.5% spread), however dividend payout could be slightly curtailed for both FFC and FFBL.

The AKBL share price has rallied strongly in recent times on the positivity from the high acquisition cost. Based on AKD Securities backs of the envelope calculations, AKD Securities arrives at a target price of PkRI76lshare for AKBL where AKD Securities believes that the AKBL share could go up to PKR2O5/share based on the weighted average of the tender price (43% of the remaining float) and 57% weight of the indicative fair value.

Impact on Faujis: FFC, FFBL and Fauji Foundation will be acquiring Army Welfare Trusts (AWT)AKBL stake in the proportion of 60%, 30% and 10% respectively Including the impact of tender offer (174mn shares), the Fauji consortium will be purchasing 585mn shares of AKBL at a price of PKR24.3/share resulting in total transaction value of PkRI4.2bn.

In this regard, FEC will be contributing PKR85bn (PkR6.7/share), FFBL PkR43bn (PkR4.57/share) and the remaining PkR1.4bn will be contributed by the Fauji Foundation.

Both FEC and FFBL are likely to use leverage to fund their purchase of the AKBL stake. Assuming Debt Equity ratio of 80:20 for the purchase, equity investment from FFC and FFBL will amount to PKR17bn and PkR853mn respectively, which could potentially lower the CY13F dividend by PkR1 .3/share for FEC and PkRO.9/share for FFBL. Net earnings impact of AKBL acquisition (share of profit less funding cost) is estimated to be slightly positive for both FEC and FFBL assuming CY13F NPAT of PkR1 .5bn for AKBL and a funding cost of 12.5% (KIBOR + 2.5% spread).

Going forward, assuming debt repayment from CY14 and a tenor for 5 years, cash outflow annual cash outflow for repayments will amount to PkR1 365mn for FEC and PkR6S3mn for FFBL resulting in a per share cash outflow of PKR1.1 and PkRO.7 for FFC and FFBL, respectively.

Given the comfortable cash position of FFC, AKD Securities sees lower risk of payout cut compared to FFBL. AKD Securities has as yet not incorporated the impact of the AKBL acquisition on FFC and FFBL and will do so upon availbibty of details of the financing structure for the acquisition.

Outlook for fertilizer sector for CY13 is bright given downward sticky urea prices and healthy demand outlook. At current levels AKD Securities has a Buy stance on FEC (Dec-end TP of PkR14O/sh) and Accumulate on FFBL (PkR44/share).

AKBL result review and outlook: AKBL posted NPAT of PkR1 .26bn (EPS: PkR1.54) in CY12, down 23%YoY. This was largely due to a loss of PkR2l8mn (LPS: PkRO.27) in 40CY12 where provisions and impairment spiked up (likely book cleaning + potential AGL impairment).

No payout was announced due to the acquisition process but a 12.5% bonus should be on the cards post completion of acquisition, in view of MCR.

Coming from a subdued CY12, back-of-the envelope workings suggest AKBL should be able to post at least 1O%YoY growth in CY13E Going forward, considering relatively low CAR (CY11: 114%), AKD Securities sees another TFC issuance (of -PkR3bn) to compensate for maturing TFCs while AKD Securities does not completely rule out a rights issue over the medium-term if focus shifts to swift balance sheet growth.

While bonus issues should continue going forward, inline with precedence (no cash dividend since CYO7) AKD Securities does not expect AKBL to sustainably start paying out cash over the medium-term.

Has AKBL ran its course? The AKBL share price has rallied strongly in recent times on the positivity from the high acquisition cost. Based on AKD Securities backs of the envelope calculations, AKD Securities estimates the company to post an NPAT of PKR1 .5bn for CY1 3F, which should translate into a year-end BV of PkR25.9/share.

Taking the CY1 3F P/B of O.86x for BAFL (AKBL’s closest peer in AKD banking universe) and a 21% discount to accommodate for the historical discount of AKBL to BAFL, AKD Securities arrives at a target price of PkR17.6/share for AKBL based on an indicative CY13 P/B multiple of O.68x for AKBL.

In the near term, AKD Securities believes that the AKBL share could go up to PKR2O.5/share based on the weighted average of the tender price (43% of the remaining float) and 57% weight of the indicative fair value.