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Pakistan Fertilizers
Earnings Preview
January 21, 2015
Fauji Fertilizer Bin Qasim Ltd
Key risks to margins persist; Reiterate
U/P
Morning Shout
PO raised to PRs42; reiterate Underperform
We have lifted our PO for Fauji Fertilizer Bin Qasim (FFBL) by 17% to PRs42 from PRs36, on
Ameet Daulat
Ameet.daulat@kasb.com
+92 21 111 222 000
the back on (1) change in macro assumptions i.e. decreasing the risk-free rate to 10%, and
(2) rolling forward our valuations. Furthermore, we believe market is unjustifiably excited on
FFBL’s recent initiatives in diversifying its revenue and earnings base in consumer segments
which may take 2-3 years to deliver any meaningful results for FFBL. Given the double
whammy that FFBL faces in the case of gas price hike and consequently the weak outlook on
margins, we reiterate our Underperform stance on FFBL. FFBL- Stock Data.
Price
Seasonal pickup in DAP demand to drive 4Q earnings
PRs48.21
Price Objective
PRs42.00
Date Established
21-Jan-15
Volatility Risk
FFBL is set to announce its 4Q14 results on 29th Jan-15. We expect the company to declare
NPAT of PRs2.4bn (EPS: PRs2.42) during the period, taking up full year earnings to
PRs3.8bn (EPS: PRs3.95), down 34% YoY. We expect the company to declare a dividend of
PRs2.5/sh in 4Q14, taking the full year payout of PRs4.25/sh. While cost increases pertaining
to GIDC dominated the dip in profitability, we expect a 3%/8% YoY decline in the offtake
levels of Urea/DAP, respectively, to keep the topline under check. This decline is partly
attributable to 6% YoY decline in the production levels of DAP owing to gas supply issues in
the first part of year. Cost increases during the year are expected to result in the gross
margins of FFBL to clock in at 24.7% vs 29.1% in 2013. However, improved profitability of
Askari Bank Limited (AKBL) and Fauji Cement Limited (FCCL) managed to slightly lift up the
EBITDA margins. During 9M14, FFBL witnessed an increase in leverage to 40% as at Sep-14
end vs 29% D/A ratio in 2013. This is expected to keep the financial costs under pressure
during 4Q14 and onwards. Monetary easing on the govt’s end will, however, bode well for
FFBL.
HIGH
52-Week Range
PRs48.21-PRs37.75
Mkt Val / Shares Out (mn)
US$446.76mn / 934
3m Avg. Daily Volume (shrs)
2,243,023
Bloomberg / Reuters
FFBL PA / JORD.KA
ROE (2015E)
35.00%
Net Dbt to Eqty (2015E)
52%
Est. 5-Yr EPS / DPS Growth
-1% / -12%
Free Float
35.00%
Diversification on track but overplayed
FFBL – Financial Summary PRs mn
2013
2014E
YoY
Sales Revenue
54,455
49,704
-9%
Gross Profit
15,873
12,276
-23%
EBITDA
11,276
8,378
-26%
EBT
8,362
5,325
-36%
Net Profit
5,613
3,693
-34%
EPS
6.01
3.95
DPS
5.50
4.25
Source: KASB Research
In line with the Fauji group’s vision to diversify, FFBL has also been keen on diversifying its
business risks in the fertilizer segment and also move into the Foods business. During 4Q14,
FFBL incorporated three wholly-owned subsidiaries:
Fauji Meat Ltd: To indulge in the halal slaughtering of animals and sale in the domestic and
foreign markets. With a project cost of PRs6.4bn, it is expected to come online in 4Q15. The
company is expected to secure financing for its Meat project during 1Q15.
Foods segment: While FFBL is believed to be in process of conducting market research for
Fauji Foods, it has shown interest in acquiring 24.9% non-voting shares and 24.9% voting
shares of Noon Pakistan ltd (NOPK). FFBL is believed to be targeting the dairy and juices
segment of NOPK (Nurpur).
-23%
FFBL Power company Ltd: Setting up an 118MW plant at Port Qasim will potentially counter
the gas supply issues which have been hampering the operations of the fertilizer business.
Given the vicinity of its plant, switching to coal is more feasible for FFBL than its peers.
KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their own
investment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its
contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB, as a full‐service firm, has or may have business relationships, including investment‐banking relationships, with the companies in this report. Page 1
Fauji Fertilizer Bin Qasim Ltd – January 21, 2015
Morning News
KSE-100 Intra-day Movement FIPI
34,172
Govt holds OGRA responsible for petrol crisis (BR): The conclusion of the PM’s meeting on
the petrol crisis was that the petrol shortage was a serious failure on the part of Oil and Gas
Regulatory Authority (OGRA) as a regulator. The report has not been released by the Prime
Minister's office or uploaded on any government website; however, a press release was issued
that contended that the committee had held OGRA, the regulator, responsible for the crisis.
High 34,187
34,131
34,090
PSO buys petrol from Shell Pakistan (BR): PSO purchased an additional 10,000MTs of
petrol from Shell Pakistan and claimed to have successfully managed to overcome the fuel
shortages occurring in some parts of Punjab province. The additional fuel was bought from a
vessel imported by Shell Pakistan which arrived here Tuesday. Further, the state-run oil giant
said to have increased its import of white oil products (petrol) and enhanced upliftment from
local refineries.
34,049
34,008
33,967
33,926
Low 33,892
33,885
9:30 AM
10:56 AM
12:20 PM
1:45 PM
3:10 PM
Source: KASB Research
Thar coal, power project to start operations in 2018 (Tribune): Sindh Engro Coal Mining
Company (SECMC), which is working in Thar on coal-based power production, has announced
it will be able to supply 660MW of electricity to the national grid by the first quarter of 2018 if the
project’s financial closure is achieved this year.
Index Data & Volume Leaders
Close
KSE30
KSE100
KSE All
Share
PSO
ENGRO
MLCF
DGKC
NBP
% Chg
Vol.
US$ mn
22,116.60
34,121.30
0.4%
0.3%
117.45
146.57
24,623.49
380.35
268.56
50.35
123.82
70.76
0.2%
2.2%
-0.7%
3.9%
3.7%
0.7%
186.08
24.79
14.56
13.30
12.64
6.83
Source: KSE
KSE-100: Top Gainers & Losers FIPI
Technical View
Ahmed Hanif
ahmed.hanif@kasb.com KSE-100: Approaching the upper monthly Bollinger band

The index formed a higher high and a higher low, formed a new all-time high and again
closed above 34,000.

The index could target the upper monthly Bollinger band, which is currently at 34,700 as it
has been forming higher highs and higher lows.

Oil & gas sector (POL and PSO) and banking sector (UBL, NBP, HBL and MCB) are looking
attractive at current levels and might guide the index towards new highs.

It is recommended to accumulate trading positions on weakness with risk defined below
33,000.
INDU
MARI
CEPB
MLCF
DGKC
DAWH
NCL
PICT
ISL
PCAL
-6%
-4%
-2%
0%
2%
4%
6%
Source: KASB Research
Page 2
Fauji Fertilizer Bin Qasim Ltd – January 21, 2015
World Markets and Commodity Prices
International Equity Markets
Asian Markets (Last trading session’s)
European Markets (Last Trading Session’s Rates)
Price
All Ordinaries
Shanghai Composite
Hang Seng
BSE 30
Jakarta Composite
KLSE Composite
Nikkei 225
NZSE 50
Straits Times
Seoul Composite
Taiwan Weighted
KSE-100 Index
Abs. Chg.
5,286.82
3,173.05
23,951.16
28,784.67
5,166.09
1,750.11
17,366.30
5,633.22
3,334.02
1,918.31
9,251.69
34,121.30
-2.2
56.7
212.7
522.7
14.0
-3.2
352.0
-4.9
26.3
15.7
77.6
107.0
% Chg.
Price
-0.04
1.82
0.90
1.85
0.27
-0.18
2.07
-0.09
0.80
0.82
0.85
0.31
ATX
BEL-20
CAC 40
DAX
AEX General
Swiss Market
FTSE 100
American Markets
Dow Jones Ind. Average
NASDAQ Composite
NASDAQ -100
S&P 500 Index, RTH
Abs. Chg.
% Chg.
2,170.24
3,403.04
4,446.02
10,257.13
437.92
8,178.90
6,620.10
22.1
7.1
51.1
14.8
2.6
26.1
34.6
1.0
0.2
1.2
0.1
0.6
0.3
0.5
17,515.23
4,654.85
4,171.21
2,022.55
3.7
0.0
20.5
29.1
3.1
0.4
0.7
0.2
Source: Bloomberg Foreign Portfolio Investment in Equities
Country
Day (US$mn)
Pakistan
India
Indonesia
Japan
Philippines
South Korea
Sri Lanka
Taiwan
Thailand
Vietnam
Abu Dhabi
Qatar
WTD (US$mn)
5.4
67.6
(26.8)
N.A
(6.1)
(20.8)
(0.2)
291.4
(25.1)
(0.1)
(4.5)
(10.4)
MTD (US$mn)
5.8
67.6
(82.6)
(5,776.4)
(0.2)
(36.3)
0.4
584.5
(55.7)
1.9
(24.3)
4.9
3.6
223.3
(229.1)
(6,114.1)
361.8
(867.7)
(3.2)
(454.6)
(586.4)
2.8
(56.8)
(90.1)
YTD (US$mn)
12M (US$mn)
3.6
223.3
(229.1)
(6,114.1)
361.8
(867.7)
(3.2)
(454.6)
(586.4)
2.8
(56.8)
(90.1)
382.6
15,990.5
3,267.2
17,883.4
1,644.5
5,005.2
150.4
11,536.8
(1,628.9)
63.0
838.1
1,931.6
Date
20-01
19-01
20-01
09-01
20-01
20-01
20-01
20-01
20-01
20-01
20-01
20-01
Source: Bloomberg, NCCPL Forex and Money Market snapshot
Current 6-Month KIBOR (Offer)
12-M T-Bill (Average)
10- year PIB (Average)
PkR/ US$
Source: KASB Money Market 9.23
8.95
10.18
100.75
Previous 9.27
8.82
10.08
100.78
Chg. -0.04
0.13
0.10
-0.03
Commodity Prices
Price
WTI (Crude Oil)
Gold
CRB Index
Source: Bloomberg 46.39
1,295.40
218.97
Abs. Chg.
% Chg.
-2.30
19.75
-5.26
-4.7
1.5
-2.3
Page 3