AKD Securities Limited Equity Research – Daily Report

Karachi, June 21, 2018 (PPI-OT): Pakistan Fertilizers: From export to import

After exporting more than 500k tons of Urea last year on account of all-time high inventory levels, the fertilizer sector dynamics are likely to take another turn this year with the industry expecting acute shortage of urea during the later part of CY18. Currently standing at 436k tons in Apr’18 (significantly lower than last 2yr average of 1.5mn tons – equivalent to just 0.9x of one month’s average production), we expect urea inventory to further go down to extreme levels in the upcoming months owing to: 1) continued high demand in the ongoing kharif season, followed by Rabi season later in Oct-Dec, and 2) lower industry production due to closure of LNG based plants (economically infeasible LNG cost) and limited gas supply. In this regard, MoI is already considering NFML’s proposal of importing 0.6mn tons urea in the current calendar year to meet the expected demand-supply gap. In our view, this highly probable import scenario presents a lucrative opportunity to local manufacturers to further increase local urea price which is currently available at ~12-15% discount to prevailing elevated cost of imported fertilizers (higher int’l prices coupled amid sharp currency depreciation). Having posted a strong recovery (market capitalization is up 13.8% CYTD) on improving fundamentals, we expect sector to remain in limelight where EFERT (TP of PkR87.8/sh) remains our top pick on the basis of an attractive dividend yield of ~11%, followed by FATIMA (TP of PkR45.1/sh).

Urea import on the cards: Higher demand on account of improved farm incomes (subsidy continuation), export of urea (+500k tons in CY17) and lower production from local players (closure of LNG based plant and limited supply of gas to other manufacturers) has led to a significant drop in urea inventory towards the end of CY17 and onwards. Declining consistently every month, urea inventory now stands at 436k tons, down 74%YoY in Apr’18 (significantly lower than last 2yr average of 1.5mn tons). This is now equivalent to 0.9x of one month’s average production for urea vs. last year’s average of 3.5x. Going forward, we expect urea inventory to further go down to extreme levels in the upcoming months owing to: 1) continued high demand in the ongoing kharif season, followed by Rabi season later in Oct-Dec, and 2) lower industry production. In this regard, MoI is already considering NFML’s proposal of 0.6mn tons urea import in the current calendar year to meet expected demand-supply gap.

Prices to remain strong: After getting done away with various discount offerings on fertilizer products in the latter part of CY17, urea is currently available in the country around an average price of PkR1,550/bag (~PkR1510 in Sindh and ~PkR1,600 in Punjab), post cumulative increase of around PkR150-180/bag in the last two months. This continuous uptrend in product prices is the effect of an overall improvement in sector dynamics (lower inventory levels and expected urea shortage consequently, higher int’l prices and PkR/US$ depreciation). In addition to, the highly probable import scenario presents a lucrative opportunity for local manufacturers to further increase local urea price, which is still trading at ~12-15% discount to prevailing elevated cost of imported fertilizers of PkR1,800-1,850 (higher int’l prices and sharp currency depreciation).

Outlook and Investment Perspective: The fertilizer sector has posted a strong recovery (+13.8% CYTD) on improving fundamentals. Going forward, we anticipate the sector to remain in limelight on the back of: 1) lower inventory levels (high demand against low production), 2) expected urea import at current elevated cost of imported fertilizers, currently hovering around PkR1,800-1,850/bag (owing to stable int’l prices along with recent bouts of PkR depreciation against US$) and 3) upward trend in local product prices (currently standing around PkR1,550-1,600/bag). Maintaining our Marketweight stance on the sector, EFERT (TP of PkR87.8/sh) remains our top pick on the basis of an attractive dividend yield of ~11% followed by FATIMA (TP of PkR45.1/sh) with its diversified product mix and an equally impressive dividend yield of above 10%.

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