AKD Securities Limited Equity Research – Daily Report

Karachi, June 27, 2018 (PPI-OT): Pakistan Fertilizers: Sector update May’18

After a promising start to CY18 (+27%YoY during 4MCY18), overall fertilizer sales came under little pressure for the first time in this calendar year owing to delayed start of the Kharif season. According to the latest figures released by NFDC, total fertilizer sales in May’18 clocked in at 669k tons, down 7%YoY. In tandem, urea sales have also decreased by 5%YoY to 494k tons in May’18. DAP offtake also remained dull during the month (down 15%YoY/15%MoM) owing to seasonal slowdown and inflated product prices. Despite this monthly slowdown, total fertilizer sales posted an encouraging growth of 19%YoY during 5MCY18 where urea offtake posted a robust growth of 29%YoY in the review period. The fertilizer sector has posted a strong recovery (market cap +11% CYTD) on improving fundamentals. Going forward, we anticipate the sector to remain in limelight on the back of: 1) lower inventory levels, 2) expected urea import at current elevated cost of imported fertilizers and 3) continuous upward trend in local product prices. 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%.

Company-wise breakup: Urea market share for FFC/EFERT/FFBL/FATIMA in May’18 was recorded at 52%/28%/12%/8% vs. share of 43%/27%/10%/14% in May’17. In this regard, FFC sold 257k tons (+15%YoY/+45%MoM), EFERT sold 137k tons (-2%YoY/+19%MoM), FATIMA sold 39k tons (+75%YoY/+38%MoM) and FFBL sold 60k tons (up 14%YoY/18%MoM). On cumulative basis, urea off-take posted robust growth in 5MCY18 (up 29%YoY), where FFC, EFERT and FFBL emerged as clear winners (respective market shares improved by 5.09ppts/4.83ppts/2.62ppts to 47.7%, 30.5% and 6.8% in 5MCY18). In tandem, urea sales for the majors jumped by 50%YoY to 749k tons, 45%YoY to 1,011k tons and 79%YoY to 199k tons respectively for EFERT, FFC and FFBL while FATIMA posted an increase of just 4%YoY to just 153k tons. DAP off-take on the other hand remained almost flat, rising by 3%YoY to 492k ton in 5MCY18 owing to inflated DAP prices during the current year. In this regard, importers sold 272k tons of DAP (up 56%YoY) while FFBL sales clocked in at 162k tons (-31%YoY).

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 329k tons, down 24%MoM/81%YoY in May’18 (significantly lower than last 2yr average of 1.5mn tons). This is now equivalent to 0.8x 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 removing 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 (market cap +11% 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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