Update Pulse

July 26, 2011

Fertilizer Sector: Preview

FFC

Result

Pakistan Research

Synopsis
Earnings to post a jump of 61% YoY in 1HCY11. Urea offtake witnessed a decline of 5% YoY in 1HCY11. Financial cost is expected to decline by 8% YoY in 1HCY11. Other income to witness a substantial rise of 82% YoY. With our fair value of PKR185 for FFC, we recommend a BUY stance.

to be the main reason behind rise in monetary sales. We believe that the substantial increase in sales is likely to take gross profit of the company to PKR12.94bn posting a rise of 46% YoY as against PKR8.84bn in the same period last year. Thus FFC seems to be having higher gross margin of 53% as against 44% in 1HCY10.

BUY
Market Snapshot KSE 30 KSE 100 KSE ALL Index 11815.91 12394.49 8590.05 Chg -101.49 -82.28 -54.55 % -0.85 -0.66 -0.63

Decline in financial charges and massive ascend in other income may further strengthen earnings...
We expect distribution cost to witness an increase of 13% YoY to PKR2.10bn in 1HCY11 against PKR1.87bn in the same period last year. This upsurge in distribution cost seems to be driven by transportation charges. However, we expect operating profit to be at PKR10.99bn with an increase of 58% over the last year. We also expect other income to jack up the bottom line as it is expected to post a rise of 82% YoY to PKR2.77bn as against PKR1.26bn recorded in 1HCY10. Foremost chunk of the other income is likely to come through dividend income from FFBL. Recommendation and outlook Gas curtailment of the fertilizer sector has created an interesting situation in FFC prospective as Engro raises price of urea to mitigate its production losses while FFC which is not greatly affected by the gas curtailment enjoys fruit of increased prices. This is the main reason that FFC has shown substantially higher margins during the 1HCY11. We believe, FFC would continue to enjoy greater margins until gas supply to Engro plants is resumed. In addition to this, locally produced urea is sold on a significantly discount to international urea prices. This situation is naturally building up pressure on policy makers to either facilitate the local players, or go for import. In our view, import would not be a sensible choice. Our DCF based target price for FFC is PKR185. recommend BUY stance. We

PAT is expected to rise by 61%...

Fauji Fertilizer Company Limited (FFC) is scheduled to announce its 1HCY11 financial results on 29th July 2011. As per our expectations, the company is expected to post a substantial rise of 61% YoY in PAT to PKR8.29bn translating into an EPS of PKR9.69, as against PAT of PKR5.10bn and EPS of PKR6.01 during the corresponding period last year. We also expect company to announce second interim cash dividend of PKR4.75/share.
(P KR m) S ales Cost of Sales Gross Profit Finance Cost Other Operating Income P rofit After Tax E PS (PKR) Gross profit margin Net profit margin 1HCY10A 19,947 11,113 8,834 494 1,525 5,101 6.01 44% 26% 1HCY11E 24,317 11,381 12,936 455 2,770 8,218 9.69 53% 34% % Chg 22% 2% 46% -8% 82% 61% 61%

Key Data Market Cap(PKR bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m)

138.3 848 FFC.PA 1.56

183%

12M FFC relative performance vs KSE

FFC KSE-100

156%

129%

102%

75% Aug-10 Oct-10 Sep-10 Apr-11 Dec-10 Mar-11 Feb-11 Jan-11 May-11 Nov-10 Jun-11 Jul-10 Jul-11

Source: Company F inancials, Summit Capital Research

Top line to post a substantial rise of 22% YoY...

We expect top line to reach PKR24.32bn in 1HCY11 by posting a substantial rise of 22% YoY over last year when sales of the company were recorded at PKR19.95bn. Urea offtake of the company remained lower by 5%YoY however, sharp rise in average urea prices of about 27% is expected to

Analyst: Muhammad Sarfraz Abbasi Sarfraz.abbasi@summitcapital.com.pk 021-35376125 B-209, Park Towers, Clifton, Karachi

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.