We iniate coverage on Fama Ferlizer Company (FATIMA) and place the stock on our convicon call list with a Dec’12 target price of PkR41.52/share ‐ Buy! Our convicon is underpinned by relavely low gas curtailment of 8%‐12% from the Mari network, subsi‐ dized feedstock gas for 10yrs at US$0.7/mmbtu and undemanding valua ons in a trade‐off for growth (PEG: 0.26). We expect NPAT to log in at an impressive 33% CAGR across CY11A‐ CY15F, led by top‐line growth. At the same me, we believe the market is missing potenal tax advantages where deferred taxaon adds an esmated PkR7.50/share to our target price. While FATIMA has gained 2.2%CYTD, it has underperformed the AKD Fer lizer Uni‐ verse by 21%CYTD where we believe the market is under apprecia ng the gradual ac‐ ceptance of FATIMA’s unconvenonal product line. Higher Margin – Lower Curtailment! FATIMA’s compeve advantage stems from lower input cost, where the company’s feedstock requirement has been locked in for a period of 10 years at US$0.7 per mmbtu (as dictated by Ferlizer Policy 2001). This translates into feed- stock cost of PkR60.67 per mmbtu for FATIMA – 80% lower rela ve to peer group. Moreover, the company’s 110mmcfd requirement is being met from the Mari based network, resul ng in annual curtailment of about 8%-12% (Sui network: ~40%). Eff ecvely, this allows FATIMA to piggy-back on Sui based ferlizer plants in the event of urea price hikes due to gas curtail- ment and/or rise in feedstock cost. A PkR100 per bag ex-factory urea price increase (coupled with PkR80 per bag increase in ex-factory CAN price) raises our CY12F EPS and TP by PkR0.29 and PkR3.60/share, respecvely. Deferred Tax ‐ Realizing Time Value of Money: Tax depreciaon on fixed assets is charged at 50% in the 1st year and at 10% - 30%, for di ff erent categories of fixed assets, from the 2nd year onwards. Since FATIMA has capitalized PkR68.6bn in CY11E, as per our esmates, its tax depreciaon will likely be high enough to trigger tax losses (not accounng loss). As a result, FATIMA will be subject to minimum applicable tax rate of 1% of revenue for first five years of operaons (CY11A-CY15F), resul ng in cash savings of PkR1.8bn – PkR6.9bn over CY11A- CY15F. Going by the me value of money, the contribuon of deferred tax to our DCF-based share price arrives at PkR7.50/share (18% of total TP). Market is under appreciang Product Suite: With FATIMA’s unconvenonal product suite, we have stress tested sales levels for unconvenonal ferlizers – CAN and NP. Based on our stress tesng, we believe the market is under appreciang FATIMA’s unconvenonal product suite and is valuing FATIMA at lower sales levels (30% of capacity for both CAN and NP) in line with our worst case esmates (see stress tesng on page 7). The upside from current market price in our view is the coupling of price performance with higher levels of ac- ceptance for the unconvenonal product line by end buyers where we es mate CAN and NP sales at 60% and 45% of capacity, respecvely, for CY12 and at a constant 82% and 55%, re- specvely, through forecast range. Valuaon & Investment Perspecve: DCF-based valuaon leads us to a Dec’12 target price of PkR41.52/share for FATIMA. We have conserva vely aached a beta of 1.25 and an equity risk premium of 6% in view of a higher risk pro file (US pressure on CAN produc on, uncon- venonal product suite & higher leverage with D/A at 51% on CY11E), leading to 19.5% cost of equity. Despite gaining 79% over the last one year, FATIMA’s valua ons are undemanding against trade off for growth (5yr NPAT CAGR: 33%) where our target price o ff ers 77% upside– BUY! FATIMA: Unconventionally Yours ! Buy Naeem Javid Investment Analyst naeem.javid@akdsecuri es.net Priced on April 04, 2012 KSE‐100 Index 13,945.30 KSE Market Cap PkR3,575bn (US$39,291mn) KATS Code FATIMA Bloomberg Code FATIMA.PA Price PkR 23.43 Market Cap (PkRmn) 43,346 Market Cap (US$mn) 476 Shares (mn) 2,000 3M High (PkR) 25.61 3M Low (PkR) 21.35 1Yr High (PkR) 26.52 1Yr Low (PkR) 12.28 3M Avg Turnover '000 5,724 1 Yr Avg Turnover '000 4,268 3M Avg DT Value (PkR'000) 135,850 3M Avg DT Value (US$'000) 1,493 1Yr Avg DT Value (PkR'000) 90,136 1Yr Avg DT Value (US$'000) 991 Important Disclosure: Important disclosures including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do busi- ness with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. AK D Secu ri ti es Member: Karachi Stock Exchange Find AKD research on Bloomberg (AKDS <GO >), firstcall.com and Reuters Knowledge Exchange Copyright©2012 AKD Securities Limited. All rights reserved. The information provided on this document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject AKD Securities or its affiliates to any registration requirement within such jurisdiction or country. Neither the information, nor any opinion contained in this document constitutes a solicitation or offer by AKD Securities or its affiliates to buy or sell any securities or provide any invest- ment advice or service. AKD Securities does not warrant the accuracy of the information provided herein. www.akdsecurities.net April 6, 2012 AKD Equity Research / Pakistan Insight FATIMA Fertilizer Co. Ltd. FATIMA vs. KSE-100 Index Source: AKD Research Price: PkR23.43, Target Price: PkR41.52. Poten al Upside: 77% -20% 0% 20% 40% 60% 80% 100% 120% 140% Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 KSE-100 Index FATIMA
