FOCUS | Equity | Fertilizer

Sector Research

Pakistan Fertilizer
Topline Securities (Private) Limited
508 Continental Trade Centre, 5th Floor
508,
Block-8, Clifton, Karachi, Pakistan
October 13, 2015 Tel: +9221-35303330-32
Fax: +9221-35303349

9M2015 urea sales down 3%, inventory at record high KSE 100 Index
34,183.85 +340.67
Pakistan’s total urea sales (local + imported) in Sep 2015 is likely to reach 200k
tons, down 52% YoY,, according to our channel checks. Sales of local urea Chemical Sector Capitalization
producers, in Sep 2015, may clock in at 151k tons – falling by 61% YoY. We Rs804.4bn
bn (US$7.7bn)
(US$
attribute this decline to farmers delayed buying decision on the back of likely cut in
urea prices.
To recall, as per media news on Oct 8, 2015, urea producers in a meeting with
Govt. officials agreed to reduce prices if Govt. gives concessions in gas prices.
Moreover, buyers were waiting for the farmer’s package announced by the Govt.
This delay in buying by farmers has resulted in significant inventory at Sep 2015
end. We estimate urea inventory at 686k tons – the highest level since Nov 2012.
Fertilizer Stocks: Earnings Estimates
In 9M2015, total urea sales (local + imported), which represents ~70% of the total
EPS 2014A 2015E 2016F
fertilizer sales in Pakistan, are likely to reach 3,965K tons – down 3% YoY. ENGRO 13.4 30.4 38.8
Urea sales of local players, in 9M2015, declined by 2% to 3,482k tons while EFERT 6.2 9.9 12.6
imported urea off-take is likely to clock-in
in at around 483k tons, down 11% YoY. FFC 14.3 14.5 15.1
FFBL 4.3 4.1 4.9
In Sep 2015, imported sales are expected at 49k tons which rose by 190% MoM as
FATIMA 4.3 4.7 5.4
domestic to international urea price discount (historically ~25
~25-30%) has almost Source: Company Account, Topline Research
disappeared.
Company wise break up reveals that all fertilizer companies in Sep 2015 posted a
decline in their urea off-takes in range of 58--92% YoY.
Engro Fertilizer (EFERT) urea sales is estimated at 65k tons in Sep 2015 versus
155k tons in Sep 2014 and 147k tons in Aug 2015 – down 58% YoY and 56%
MoM. In 9M2015, the company posted decline of 1 1.4% YoY to 1,303k tons.
In Sep 2015, urea off-taketake of Fauji Fertilizer (FFC) is estimated at 78k tons as
compared to 185k tons in Sep 2014 and 235 235k tons in Aug 2015. During 9M2015,
off-take
take of FFC is likely to decline by 3% YoY to 1,864
1,864k tons.

Fertilizer: Urea offtake

tons'000 9M2015 9M2014 YoY Sep'15E YoY MoM
FFC 1,864 1,920 -3% 78 -58% -67%
ENGRO 1,303 1,322 -1% 65 -58% -56%
FATIMA 272 259 5% 3 -92% -78%
Local 3,482 3,553 -2% 151 -61% -63%
Imported 483 544 -11% 49 52% 190%
Total (Local + Imported) 3,965 4,097 -3% 200 -52% -53%
Source: Topline Research Muhammad Tahir SaeedAC
Tel: +9221-35303346
tahir.saeed@topline.com.pk
Best Local Brokerage House 2011-14
Topline Securities (Private) Limited does and seeks to do business with companies covered in its research
reports. As a result, investors should be aware that Topline m may have a conflict of interest that could affect the
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 Pakistan Fertilizer Sector Research

Fatima Fertilizer (FATIMA) off-take

take in Sep 2015 is anticipated to clock in at just
3.2k tons versus 38k tons in same month last year and 15k tons when gauged
against in Aug 2015. In 9M2015, sales are likely to stand at 272k tons, up 5% YoY.

Fertilizer: Urea volumetric sales

mn/ton Local Imported
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2015E
2013A

2014A

2016F

2017F
Source: NFDC, Topline Research

Preferred stocks: EFERT and FFC

Although, we have a ‘Neutral’ stance on the fertilizer sector of Pakistan but FFC
and EFERT are expected to post a decent return, we believe.
We like EFERT owing to continuous availability of gas to both plants and inflow of
concessionary gas from Guddu till Dec 2015, lifting of covenant on dividend
payment and aggressive deleveraging of its balance sheet. We expect EFERT to
post earnings of growth of 61% in 2015 and 27% in 2016 due to the
aforementioned reasons. Currently,
y, the stock is trading at 2015 E PE of 9.3x.
Another preferred pick is Fauji Fertilizer (FFC), as recent price correction (down
14% since July to date) has opened up the stock valuation coupled with attractive
dividend yield of 11%. Furthermore, FFC is tr trading at lowest PE of 8.6x among
Topline fertilizer universe.

Fertilizer: Key Numbers

2013A 2014A
A 2015E 2016F 2017F
PE 12.8 13.0 9.8 8.4 7.5
Earnings Growth 59% -2%
2% 32% 18% 12%
PBV 4.1 3.8 3.8 2.8 2.4
Dividend Yield 5% 6% 7% 7% 8%
ROE 32% 29% 38% 34% 33%
Source: Topline Research

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Pakistan Fertilizer Sector Research

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Pakistan Fertilizer Sector Research

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