AKD Securities Limited Equity Research – Daily Report

Karachi, December 28, 2017 (PPI-OT): Pakistan Fertilizers: Sector update Nov’17

Following its previous months performance of CY17, fertilizer off-take remained promising in Nov’17 as well on the arrival of Rabi season coupled with continued support from subsidy package. According to the latest figures released by NFDC, total fertilizer sales in Nov’17 clocked in at 1.26mn tons, up 37%MoM. Similarly, urea sales have also jumped by 60%MoM to 602k tons. Furthermore, DAP sales also registered a growth of 30%MoM to 502k tons in Nov’17. However, on yearly basis, total fertilizer/Urea/DAP off-take came down by 20.8%/21.3%/20.5% in Nov’17 on account of higher sales in the previous months. On a cumulative basis, total fertilizer sales posted encouraging growth of 13%YoY to 8.84mn tons during 11MCY17 where urea off-take posted a decent growth of 12%YoY to reach at 5.14mn tons.

Near-term checkpoints for the fertilizer industry remain in the form of: 1) ongoing Rabi season to continue driving demand, 2) international pricing dynamics (urea prices rebounded to US$260/ton, up 60% since low of US$163/ton in Jun’17), and 3) normalization of inventory level (urea inventory standing at 506k tons vs. 1.45mn tons in Nov’16). Maintaining our Market weight stance on the sector, FATIMA (TP of PkR45.1/sh) remains our top pick with its diversified product mix, continuous improvement in market share and concessionary gas pricing, followed by EFERT on the basis of attractive dividend yield of 11% at current levels.

Company-wise breakup: Urea market share for FFC/EFERT/FFBL/FATIMA in Nov’17 and 11MCY17 was recorded at 45%/32%/14%/7% and 41%/31%/9%/11% vs. share of 46%/28%/10%/10% in Nov’16 and 47%/28%/9%/10% in 11MCY16 respectively. In this regard, FFC sold 272k tons (+45%MoM/-22%YoY), EFERT sold 195k tons (up 55%MoM/10%YoY), FATIMA sold 32k tons (up 8.4xMoM/-10%YoY) and FFBL sold 83k tons (up 72%MoM/15%YoY). Urea off-take posted impressive growth in 11MCY17, where EFERT, FATIMA and FFBL emerged as a clear winners (double digits growth) with sales rising by 24%YoY to 1.62mn tons, 18%YoY to 542k tons and 16%YoY to 475k tons respectively, while FFC posted decline of 2%YoY to 2.11mn tons.

DAP off-take on the other hand remained on the lower side, sliding by 20.5%YoY to 502k ton in Nov’17 on account of higher sales in the previous months. In this regard, FFBL sold 194k tons of DAP in Nov’17 (up 33%MoM / down 8%YoY) while imported DAP sales clocked in at 308k tons (+28%MoM/-27%YoY). Looking at respective market shares, FFC lost out significantly in 11MCY17, where its market share reduced by 5.6ppts to 41%, while EFERT and FATIMA share improved by 309bps and 54bps to 31% and 11% respectively.

Inventory levels under control: Higher demand on account of improved farm incomes along with export of urea and lower production from local players (down 6%YoY to 5.17mn tons in 11MCY17) has led to significant drop in urea inventory towards the end of the year. Declining consistently every month, urea inventory now stands at just 506k tons (down 65%YoY/27%MoM) in Nov’17. This is now equivalent to 1.1x of one month’s average production for urea vs. last year average of 2.9x. This is likely to ease down further given strong expected demand in Rabi season and lower production from local manufacturer in the winter season (curtailment in gas supply).

Outlook and Investment Perspective: After correcting sharply in 1HCY17, the fertilizer sector has posted a strong recovery (+12% since Aug’17) on improving fundamentals. Going forward, we anticipate further betterment on the back of: 1) strong demand in Rabi season, 2) normalization of inventory levels and 3) rising international pricing dynamics and 4) upward trend in local product prices. In this backdrop, we also expect urea manufacturers to further reduce prevailing high level of discounts in the market (currently hovering around PkR50-80/bag), thus improving margins. Maintaining our Market weight stance on the sector, FATIMA (TP of PkR45.1/sh) remains our top pick with its diversified product mix, continuous improvement in market share and concessionary gas pricing, followed by EFERT on the basis of attractive dividend yield of 11% at current levels.

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