AKD Securities Limited Equity Research – Daily Report (06-11-2019)

Karachi, November 06, 2019 (PPI-OT): FFBL: GIDC holds the key

We revisit our investment case on Fauji Fertilizer Bin Qasim Ltd (FFBL), stress-testing our numbers for potential downside risks. FFBL’s standalone losses during 9MCY19 increased to PkR2.4bn (LPS: PkR2.59), much higher than PkR203mn (LPS: PkR0.22) in SPLY, led by: (i) 522 bps YoY decline in gross margins, (ii) 2.3xYoY higher finance cost and, lastly (iii) effective tax rate of 86%, vs. 57% in 9MCY18.

Our base case incorporates lower GIDC rates by PkR150/75 per mmbtu for feed/fuel (in line with the now sub-judice Presidential Ordinance regarding GIDC and consequent lower urea price at PkR1800/bag. FFBL would stand a major beneficiary in this regard given substantial improved PMs on DAP with a resultant TP of PkR31.3/sh.

On the flip side, however, newsflow today indicates the GoP has framed the GIDC Levy, Collection and Implementation rules, which if implemented in tandem with gas infrastructure projects, may potentially strengthen the GoP’s case for GIDC – a bear case for Ferts. Assuming continuity of current GIDC rates in this scenario, FFBL stands to be the most adversely impacted given lower DAP PMs.

In the above context, assuming (i) 20% YoY decline in urea offtake, coupled with 10% YoY higher DAP offtake for CY19, with slight improvement thereon, (ii) current urea price and gas/GIDC rates and, (iii) reduction in policy rate by 100 bps over CY20F, FFBL shall continue to post losses on standalone basis over our investment horizon (bear case TP: PkR18/sh).

If FFBL offloads its existing stakes in cash-draining FFL (51%) and FML (83.33%), the cash inflow could assist FFBL in deleveraging, and transpire into PkR1.85/sh positive EPS impact (assuming a transaction price as per book value). However, lower GIDC rates would remain crucial for standalone profitability over our investment horizon.

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