AKD Securities Limited – EFERT: Top pick in Fertilizer space

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Karachi, April 02, 2015 (PPI-OT): AKD Securities Limited updates AKD Securities Limited’s investment case on EFERT where post incorporation of Eximp’s fertilizer trading business, tweaking finance cost and capacity utilization assumptions AKD Securities Limited revises AKD Securities Limited’s earnings forecast by 14.2% in CY15E to PkR13.23/sh vs. PkR11.59/sh previously, while the same over the long term (CY16-20) improves by 4-5%. Based on this and the recent 50bps reduction in DR AKD Securities Limited raises AKD Securities Limited’s Dec’15 TP by 22.4% to PkR102/sh. EFERT announced NPAT of PkR8.20bn (EPS: PkR6.29) in CY14, higher by 35%YoY vs. NPAT of PkR5.49bn (EPS: PkR4.66) in CY13.

Improved earnings were achieved on the back of 22.5%YoY topline growth in CY14 owing to continued gas supply from Guddu and 33.2%YoY decrease in finance cost to PkR6.62bn on account of early repayments and lower interest rates environment.

In addition to this, CY14 result was accompanied by a surprise first ever DPS of PkR3.00. AKD Securities Limited a Buys stance on EFERT as the scrip at present trades at CY15E P/E of 6.05x (KSE-100 P/E 8.05x) and offers D/Y of 8.3% (KSE-100 D/Y 6.08%) and provides an upside of 29.1% against AKD Securities Limited’s revised TP of PkR103. Furthermore, as news regarding gas price rationalization make rounds, AKD Securities Limited opines EFERT remains one of the key beneficiaries as it enjoys feed gas supply fixed at US$0.70/mmbtu.

Result Review: EFERT announced NPAT of PkR8.20bn (EPS: PkR6.29) in CY14, higher by 35%YoY against NPAT of PkR5.49bn (EPS: PkR4.66) in CY13. In addition to this, CY14 result was accompanied by a surprise first ever DPS of PkR3.0. Improved earnings were achieved on back of: 1) topline growth at 22.5%YoY in CY14 owing to continued gas supply from Guddu, 2) 2.13x YoY increase in other income on account of additional income generated on GIDC amount (yet to be paid out to GoP) and 3) 33.2%YoY decrease in finance cost to PkR6.62bn in CY14 on account of early repayments and lower interest rates.

Improving investment profile In CY14: AKD Securities Limited sees EFERT’s profitability increasing by 35%YoY due to continued gas supply from Guddu.

The company decided to utilize this improved profitability to deleverage its balance sheet by implementing cash sweep well ahead of its timeline along with prepayment of TFC. Recall that in CY14, EFERT repaid more than PkR16.80bn of its long term borrowings and refinanced loans worth PkR3.2bn at cheaper rates. AKD Securities Limited believes this trend is likely to continue going forward as well where the company’s earnings are forecasted to grow at 3yr (CY15-17) CAGR of 34.68%.

Debt is not a big concern anymore: During the period under consideration, the company saw its long term borrowings declining by 46.6%YoY to PkR36.09bn from PkR52.89bn in CY13. As mentioned above, this trend is likely to persist in CY15 as well where AKD Securities Limited foresees D/E to further drop to 0.99x. AKD Securities Limited’s conviction stems from the impressive turnaround and debt management abilities that EFERT was able to display post CY12, where D/E fell from 4.45x in CY12 to 1.35x in CY14.

Outlook and Investment Perspective: Incorporating positives that Eximp Fertilizer trading business brings with itself, along with tweaking finance cost and capacity utilization assumptions, AKD Securities Limited upgrades AKD Securities Limited’s earnings estimates for EFERT by 14.2% in CY15E to PkR13.23/sh vs. PkR11.59/sh previously, while the same over the long term (CY16-20) improves AKD Securities Limited’s estimates by 4-5%. AKD Securities Limited a Buys stance on EFERT as the scrip at present trades at CY15E P/E of 6.05x (KSE-100 P/E 8.05x) and offers D/Y 8.3x (KSE-100 D/Y 6.08%), offering an upside of 29.1% against AKD Securities Limited’s revised TP of PkR103. As far as risks regarding gas price rationalization are concerned, AKD Securities Limited believes EFERT and FATIMA remain well shielded compared to peers (as feedstock gas supplied at fixed rate of US$0.7/mmbtu), further strengthening AKD Securities Limited’s investment case.