Mar 28, 2016 - Research Entity Notification Number: REP-005. The National .... on total stock returns versus BMA's index
Pakistan Fertilizers
Research Entity Notification Number: REP‐005
Downtrend in fertilizer sales continues in Feb’16 Chemical Sector Performance
1M
1Q
12M
2%
‐7%
‐7%
‐4%
‐8%
‐12%
Absolute % Relative to KSE %
The National Fertilizer Development Centre (NFDC) released the fertilizer off‐take numbers for the month of Feb’16. Total urea off‐take continued its slowdown, falling by 7.5%MoM/30.9%YoY to 315k tons in the month. The decline in sales was primarily attributable to continued pressure on farmer’s income following low commodity prices coupled with the expectation in the market of yet another spree of price discounts by manufacturers in the coming season. The DAP off‐take however, continued to gain support from the GoP subsidy and thus clocked in at 71k tons, up 12.2%YoY. Amongst fertilizer manufacturers, EFERT witnessed the lowest decline in urea sales, falling 13.4%YoY followed by FFC with a 20.7%YoY decline in sales. A key point to note is that as a result of depressed fertilizer demand, there have been no urea imports since Oct’15 with imported inventories standing at 278k tons. Furthermore, imported urea off‐take has plunged 98%YoY to a mere 1.5k tons in Feb’16, indicating farmer’s preference for locally produced urea. Within an uncertain operating environment, we prefer EFERT due to i) its partial hedge against increase in gas prices, ii) cheap valuations (P/E: 6.2x) and iii) possible upside from continued dual plant operations. At our target price of PKR98/sh, the scrip offers a total return of 50% – ‘Overweight’
Chemical Sector vs KSE100 Index Chemicals
KSE100 Index
20% 10% 0%
Mar‐16
Jan‐16
Feb‐16
Dec‐15
Nov‐15
Oct‐15
Sep‐15
Jul‐15
Aug‐15
May‐…
Apr‐15
Mar‐15
Jun‐15
‐10% ‐20%
Source: PSX, BMA Research
Monday March 28, 2016
Engro Fertilizers Limited: Urea off‐take for the month of Feb’16 declined to 128k tons, down 7.5%MoM/13.4%YoY, compared to 138k tons and 148k tons in Jan’16 and Feb’15, respectively. On the phosphate front, DAP off‐take for EFERT declined significantly in Feb’16, falling 70.8%MoM/34.4%YoY to 11k tons. Fauji Fertilizer Company Limited: The Company witnessed a decline of 4.2%MoM/20.7%YoY in urea off‐take, settling at 146k tons for the month. Besides low sales, building inventories is a serious concern for FFC since its current debt (net of cash and short term investments) stood at ~PKR9.5bn as of Dec’15 vis a vis inventory levels of 99k tons, which in Feb’16 has increased to 233k tons. Fauji Fertilizer Bin Qasim Limited: DAP off‐take for the company has remained low at 25k tons in Feb’16 down 13.2%YoY. Even with the subsidy, the cost differential between DAP and urea is weighing in. Furthermore, the share of locally produced DAP in total DAP sales mix has declined to 25% in 2MCY16 compared to 42% in CY15 and 5yr average of 46%. Fatima Fertilizer Company Limited: The Company, in line with the industry, also posted a decline in urea sales by 49%MoM/50%YoY. CAN and NP off‐take also remained subdued at 29k tons and 17k tons, down 36%YoY and 39%YoY, respectively.
Sajjad Hussain
Investment perspective: Though urea sales continued its downward trajectory in Feb’16 as well, we believe local manufacturers have managed to contain the decline in sales despite the absence of price discount to support demand. Furthermore, reversal in the international urea prices and low off‐take of imported urea are indicators of relative stability in the sales of locally manufactured, going forward. Within an uncertain operating environment, we prefer EFERT due to i) its partial hedge against increase in gas prices, ii) cheap valuations (P/E: 6.2x) and iii) possible upside from continued dual plant operations. At our target price of PKR98/sh, the scrip offers a total return of 50%, as of last close – ‘Overweight’
[email protected] +92 21 111 262 111 Ext: 2062
www.jamapunji.pk
BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact:
[email protected] or call UAN: 111‐262‐111
1
Fertilizer off‐take for the month of Feb’16 ‘000’ tons
Feb'16
Jan'16
MoM
Feb'15
YoY
2MCY16
2MCY15
YoY
Urea
315
341
‐7%
456
‐31%
656
1084
‐40%
DAP
71
77
‐7%
64
12%
148
136
9%
CAN
52
41
27%
45
17%
94
64
45%
NP
71
91
‐22%
45
56%
574
460
25%
EFERT
128
138
‐7%
148
‐13%
266
315
‐16%
FFC
146
152
‐4%
184
‐21%
298
416
‐28%
FFBL
19
8
155%
0
‐
27
2
1004%
FATIMA
15
30
‐49%
31
‐50%
46
69
‐34%
FFBL
25
12
109%
29
‐13%
37
57
‐35%
EFERT
11
39
‐71%
17
‐34%
50
28
82%
Urea
DAP
Source: NFDC
BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact:
[email protected] or call UAN: 111‐262‐111
2
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Rating definitions
Overweight
Total stock return > expected market return + 2%
Market‐weight
Expected market return ± 2%
Underweight
Total stock return 20% upside potential
Accumulate
>=5% to
