AKD Securities Limited – Do Ferts have the muscle? AKD Securities Limited believes so

Karachi, March 27, 2015 (PPI-OT): Coming from a low base in the corresponding period last year, total urea off take in 2MCY15 stood at 1.084mn tons compared to 0.997mn tons during the corresponding period last year – a growth of 8.7%YoY (as per recently released NFDC figures). In this regard, total urea off take in Feb’15 stood at 455.58k tons compared to 628.87k tons in Jan’15, a 27.6%MoM sequential decline. Furthermore, DAP sales showed seasonal down tick, registering a decrease of 37.1%YoY to 63.60k tons in Feb’15.

That said AKD Securities Limited attributes recent price performance to interest rate dynamics and improved outlook where having gained 8.9%CY15TD, the Fertilizer space outpaced the broader market by 4.4% highlighting investors’ interest. At current levels, AKD Securities Limited believes any further dip in fertilizer sector share prices should be eyed as an opportunity to build fresh positions where AKD Securities Limited’s preferred plays are FATIMA (TP: PkR50.27/share; liking due to subsidized feedstock), FFBL (TP: PkR62.18/share; due to 10.9% D/Y) and FFC (TP: PkR157/share; due to 9.3% D/Y).

Urea/DAP Sales: During 2MCY15 the country’s total urea offtake stood at 1.084mn tons compared to 0.997mn tons during the corresponding period last year – a growth of 8.7%YoY backed by improved demand. Total urea off take during Feb’15 was realized at 455.58k tons, -27.6%MoM/+20%YoY, while DAP off take during Feb’15 slowed down, registering a decline of 37.1%YoY to 63.60k tons. On a sequential basis, DAP sales declined by 11.7%MoM. That said, DAP offtake by the sole local producer, FFBL, recorded growth of 2.9%MoM/15.7%YoY to 28.72k tons in Feb’15.

International roundup: In an interesting development this week, Chinese urea production rose by 5.4% in Jan’15 and Feb’15, having been down in FY14. This increased production, combined with capacity augmentation in other regions is the main explanation for market oversupply. Moreover, there is a substantial amount of new urea capacity due to come online in 1QCY15 and early 2QCY15 including 600kt in Indonesia (Keltim), 1.25mt in Saudi Arabia (Safco), 2.5mt in Algeria (AOA) and 660kt in Egypt (Mopco/Agrium), which already appears to be weighing down on sentiment. In total, this capacity should add around 5mt (3%) to global supply, hence short term downward pressure in international urea prices may persist.

Local roundup: Contrary to popular belief, AKD Securities Limited believes gas price increase for fertilizer sector would be limited to feedstock prices, which if increased to PkR200/mmbtu (+62.02% from its current price of PkR123.44/mmbtu) would translate into ~PkR100/bag price increase. In this regard, keeping in mind the current premium that int’l urea enjoys over locally produced (at 22.7%), AKD Securities Limited feels increase cost pressures are likely to be passed on to the end consumers where manufacturers would maintain their margins. In this scenario those who are supplied gas at concessionary rates will be prime winners as they will experience margin expansion.

Outlook and Investment Perspective: The Fertilizer sector lost 6.1% in 12 trading sessions after news regarding gas price increase, negatively affected investor sentiment. That said, with a 22.7% differential between int’l and local urea prices currently, room exists for local manufacturers to pass on cost pressures, a move which will lead to margin expansion for those getting gas at concessionary rate (US$0.70/mmbtu).

At current levels, AKD Securities Limited believes any further dip in fertilizer sector share prices should be eyed as an opportunity to build fresh positions where AKD Securities Limited’s preferred plays are FATIMA (TP: PkR50.27/share; liking due to subsidized feedstock), FFBL (TP: PkR62.18/share; due to 10.9% D/Y) and FFC (TP: PkR157/share; due to 9.3% D/Y).