AsiaNet-Pakistan Premier Editorial Content and Press Release Distribution Service
Karachi, March 16, 2015 (PPI-OT): With the GoP assuring IMF that gas prices will be rationalized w.e.f
April 15, a swift wave of negativity has swept across the fertilizer sector in particular. The sector, which remained the star performer since the turn of the year (up 12.66% CY15TD), has failed to outpace the broader market since Mar 10’15, ever since the news of gas price hike made its way to the bourse. That said, despite all the negativity regarding margins erosion due to the gas price hike, AKD Securities Limited believes that increase in input cost is likely to be passed on to the end consumer.
With margins expected to remain intact, AKD Securities Limited flags current round of negativity in the fertilizer sector unwarranted and maintain AKD Securities Limited’s Market Weight stance for the sector. In this regard, with the recent release of FFBL’s annual accounts, AKD Securities Limited upgrades AKD Securities Limited’s investment case for the company where AKD Securities Limited revises AKD Securities Limited’s TP by 5.5% to PkR59.3/share.
Moreover, AKD Securities Limited does also incorporated earnings from diversification projects i.e. wind energy. FFBL is currently trading at CY15E P/E of 9.3x where AKD Securities Limited an Accumulates stance on the scrip, providing an upside of 14.5% from AKD Securities Limited’s revised TP of PkR59.3/sh. The scrip also offers CY15E D/Y of 10.2%; taking the total returns to 24.7%.
Wind power project: With the release of latest annual accounts for FFBL AKD Securities Limited updates AKD Securities Limited’s investment case to incorporate earnings from lucrative wind power investments. To recall Wind Energy 1 and 2 are 50MW wind turbine plants, costing US$135mn and having a D/E ratio of 75/25 each, where FFBL has a 35% stake in the equity base of each plant.
With Wind Energy 2 commencing operations from Feb’15 while Wind Energy 1 expected to do the same in Mar’15, FFBL’s other income is likely to bolster as the NEPRA approved tariff allocates a 17% IRR for each project, stipulating a minimum generation benchmark at 32.2% load factor.
Indexing for PkR/US$, and keeping generation levels at benchmark, a 35% stake in Wind Energy 1 delivers a PkR0.17/share impact to the bottom-line of FFBL. ROE levelised tariff for Wind energy 2 is set at PkR0.21/share for FFBL’s stake; bringing the combined annualized impact of wind generation projects to PkR0.38/share.
Gas price hike, again?: The GoP has mulled to further increase gas prices in light of IMF considerations. As per AKD Securities Limited’s calculations, every PKR 100/mmbtu increase in fertilizer fuel not passed on shall lead to annualized earnings dilution of PKR 0.40/share for FFBL, while at the same time every PkR50/mmbtu increase in feed gas not passed on will dampen the company’s earnings by ~PkR0.50/share. That said with18% differential between local and imported urea prices, room is available for prices to be increased. In this scenario, FFBL’s margins are likely to sustain if not improve.
Investment perspective: While core fertilizer dynamics are likely to remain unexciting in terms of growth, FFBL’s diversification initiatives appear to have room to drive shareholders value going forward. As far as gas price increase is concerned AKD Securities Limited believes investors have overreacted with FFBL losing 9.6% of its market cap since its CY15 peak of PkR56.66/sh. AKD Securities Limited an Accumulate stance on the scrip which provides upside of 14.5% from AKD Securities Limited’s revised TP of PkR59.3/sh. The scrip also provides CY15E D/Y of 10.2%; taking the total return to 24.7%.