AKD Securities Limited – Fertilizer Review: Mar’15

Karachi, April 29, 2015 (PPI-OT): Official statistics released by the National Fertilizer Development Centre (NFDC) reflect 6%YoY improvement in 3MCY14 fertilizer offtake to 1.92mn tons against 1.82mn tons sold during the same period last year. The said increase in cumulative fertilizer sales came as a result of 10% higher urea sales during the period under consideration.

Conversely, 3MCY15 DAP sales faltered by 9%YoY to conclude 1QCY15 at 183k tons. With no likely surprises on the volumetric front, AKD Securities Limited believes near-term checkpoints for the fertilizer industry to remain: 1) GIDC, which AKD Securities Limited opines is here to stay keeping in mind the commitments made to the IMF and 2) international pricing dynamics, where urea prices are down 12%YoY.

At current levels, any dip in fertilizer companies’ share price should be eyed as an opportunity to build fresh positions. In this regard, 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) remain AKD Securities Limited’s preferred plays within the fertilizer space. That said, AKD Securities Limited reiterates that any further cut in the policy rate will further rejuvenate the price performance of the sector.

International roundup: A combination of growing supply and lower input costs for marginal producers in Europe (hub gas), Ukraine (oil-linked gas) and China (anthracite and thermal coal) are combining to cause deflationary pressure in the urea markets.

Though short term downward pressure has stabilized, however, with substantial supply scheduled to ramp up this year; it is likely that production costs of marginal producers in China will be the key to setting global prices. Global urea prices have continued to show signs of stabilization this week although the trend is still flattish. This follows two months of price declines which had been caused by lower production costs for swing producers in Ukraine, China and Western Europe, and general oversupply.

Local roundup: On the express request of the GoP, EFERT has paid 35% of GIDC it owed to the former. The remaining 65% will be paid in 3 equal installments (April, May, June), unless there is a court decision that deems it illegal. In this regard, AKD Securities Limited believes other fertilizer companies will follow the suit in order to help the GoP bridge fiscal gap before FY16 budget. Subject to shareholder approval, EFERT is also expected to complete the Eximp business purchase within 2QCY15, where AKD Securities Limited’s channel checks suggest the company venturing into Potash (MOP) business.

Outlook and Investment Perspective: The Fertilizer sector has gained 11%CYTD primarily on reduction of policy rate which remained favourable for leveraged players (EFERT and FATIMA) and high dividend paying (FFC and FFBL) companies. 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).