JS Securities Limited – Morning Briefing

Karachi, December 20, 2017 (PPI-OT): FFC: One of our favourites in bearish spell – ‘Buy’ with TP of Rs87

We reiterate our ‘Buy’ call on Fauji Fertilizer Company (FFC) with a Dec-2018 Target Price of Rs87.

The stock provides strong 2017E/2018F D/Y of 8.5%/11.5% at current levels. Amidst volatile market conditions, FFC stands out as an attractive bet on a risk-return matrix.

The sector is witnessing a turnaround after depicting one of the worst years in the last decade where we saw supply glut in the urea market. With shut down of three production units, supply-side dynamics are now favouring Pak Fertilizers.

Our calculations suggest that supply carry-overs should normalize to 0.6-0.7mn tons levels vis-a-vis over 1mn tons recorded over the last two years, which should help keep prices near Rs1,400/bag limit set by the government.

In 2018F, we expect FFC to witness rebound in profitability by around 36% YoY (expected EPS of Rs8.76).

High D/Y in a bleeding market, ‘Buy’

We reiterate our ‘Buy’ call on Fauji Fertilizer Company (FFC) with a Dec-2018 Target Price of Rs87. The stock has plummeted by ~24% during YTD 2017 as against KSE-100 index’s decline of 21% and fertilizer sector’s fall of 21%, underperforming both by ~3% given weakening profitability. The stock now provides an attractive 2017E/2018F D/Y of 8.5%/11.5%. To our Dec-18 Target Price of Rs87, the stock provides potential upside of 16% from present levels. Amidst volatile market conditions, FFC stands out as an attractive bet on a risk- return matrix, in our view. Key risks to our investment thesis include (1) resurrection of urea supply glut, (2) weaker-than-expected prices, (3) larger-than-expected increase in natural gas prices and (4) weak agronomics resulting into weak urea offtake.

Sector’s fortunes likely to improve

The sector is witnessing a turnaround after depicting one of the worst years in the last decade where the industry endured supply glut in the urea market. With shut down of three production units, supply-side dynamics are now favouring Pak Fertilizers. Our calculations suggest that supply carry-overs should normalize to 0.6-0.7mn tons levels vis-a-vis over 1mn tons recorded over the last two years, which should help keep prices near Rs1,400/bag limit set by the government. Latest PBS data indicates average prices of Sona Urea near Rs1,416/bag which in our view translates into Dealer Transfer Prices (DTP) of Rs1,360-1,380/bag. We believe that DTP has the potential to go up to Rs1,400/bag going forward and we assume the same for forecasts beyond 2018F.

FFC profits expected to grow by 36% in 2018F

The year 2016 remained the worst year for FFC in terms of profitability during the past five years (2012A-2016A) where the company recorded a massive decline of ~30% YoY in profitability. Battering of profits has continued in 2017 as well, with 9M2017 EPS clocking-in at Rs4.66 (down by ~21% YoY). The end of 2017E should mark the end of a bad spell in terms of profitability with full year EPS expected at Rs6.45 (down ~30% YoY). In 2018F, we expect FFC to witness rebound in profitability by around 36% YoY (expected EPS of Rs8.76).

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