Arab Potash Company: BUY - Sustainable Fundamentals and Expansion Plans Driving Growth

Gl o b a l Re s e a r c h
Se p t e m b e r 2 0 0 8
Eq u it y
Arab Potash Company
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Sustainable Fundamentals ...
Global Investment House KSCC
Sharq, Global Tower
P.O. Box 28807 Safat
13149 Kuwait
Tel: (965) 295 1000
Fax: (965) 295 1005
E-mail: research@global.com.kw
http://www.globalinv.net
Global Investment House stock market indices can be accessed
from the Bloomberg page GLOH
and from Reuters Page GLOB
Omar M. El-Quqa, CFA
Executive Vice President
omar@global.com.kw
Phone No: (965) 295 1110
Faisal Hasan, CFA
Head of Research
fhasan@global.com.kw
Phone No: (965) 295 1270
Hettish Kumar
Financial Analyst
hkumar@global.com.kw
Phone No: (965) 295 1281
Syed Taimure Akhtar
Financial Analyst
saktar@global.com.kw
Phone No: (965) 295 1278
Global Research - Jordan t|cc+| laestaeat hcuse
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September 2008
BUY
ARAB POTASH COMPANY
Tickers:
APOT.ASE (Reuters)
APOT JR (Bloomberg)
Listing:
Amman Stock Exchange
Current Price:
JD49.49 (As on 23rd September, 2008)
Investment Summary
Arab Potash Company (APOT) is a Jordan-based manufacturer and supplier of potash
primarily for use in agriculture. The company was formed in 1956 as a pan-Arab business
venture and has a 100-year concession from the government of Jordan to manufacture and
market mineral products derived from the Dead Sea. The company currently has potash
production of 1.9mn tons which the company plans to expand to 2.4mn tons by the end of
2009.
Expansionary plans led to the partial privatization of Arab Potash Company in 2003
separating the Companys main activities from the supporting ones, allowing for
private sector investment and subsequently enhancing the Companys efficiency and
competitiveness to meet the growing demand.
Its subsidiaries and affiliates include Numeira Mixed Salts and Mud Company, Jordan
Dead Sea Industries Company, Jordan Magnesia Company, Arab Fertilizers and Chemicals
Industries Ltd. (KEMAPCO), Jordan Bromine Company, Jordan for Investment and
South Development and Nippon Jordan Fertilizers Company. Arab Potash Company PLC
is headquartered in Amman.
The Company announced that it will enter a joint venture with Jordan Phosphate Mines
Company to establish a new company, which will invest approximately JD70mn
to rehabilitate the existing jetty and construct a new jetty in a period of 3 years. Both
companies will own a 50% stake in the newly established company.
The Companys sales revenue increased by 41% in 2007 to JD291mn as compared to
JD207mn in 2006, an increase of over 40%. This increase was possible because of an
increase in the sales volume which was also aided by rising prices. During 2007, the
company was able to sell 1.85mn tons of Potash, higher by 13% as compared to that in
2006. During 2007, the prices of potash increased by 8% to JD136/ton as compared to
JD126/ton in 2006.
The companys other sources of income include: interest & commission income, return
on cash deposits, foreign exchange activities and share of profit from associates. In
2007, a substantial profit was earned from these sources which amounted to JD75.8mn
as compared to JD6.9mn in 2006. During the year, company profit from associates
amounted to JD9mn as compared to JD5.6mn in 2006. In 2007, the company recorded
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one time gains from gains of Jordan Magnesia Company and reversal of provision which
amounted to JD43.8mn.
The companys net income for the year rose from 284% to JD150mn (EPS: JD1.80) as
compared to JD39.13mn (EPS: JD0.47) in 2006. Its net margins rose heavily in the
wake of extraordinary income earned through other sources. As a result in 2007, the
Companys net margins rose from 18.9% in 2006 to 51.5% in 2007. In 2007, first quarter
was the most profitable, where the company earned JD52.4mn at margins of 78%, while
the least profitable was the third quarter in which the company earned JD21.8mn.
Total assets of the company rose by 36% to JD543mn as compared to JD400.4mn in
2006. During the year the major increase was witnessed in the project in progress account
which rose by 111% to JD76.2mn as compared to JD36.1mn in 2006. The increase in the
project was duet to the undergoing expansion of the potash business. Receivables and
inventories increased during the year by 60% and 80% to JD97.9mn and JD12.5mn in
2007. Other assets rose significantly during 2007 to JD47.9mn.
The Company reported net income of JD90.1mn (EPS: JD1.08) for the first half of 2008
as compared to JD98.0mn (EPS: JD1.17) in the same period of 2007. During the half year
period, the net assets of the company increased by 26.4% to JD566mn as compared to
JD543mn at the end of 2007.
The Company currently produces 1.9mn tons of potash, and it is undergoing expansion by
0.5mn tons is scheduled to come in during the second half of 2009. This would raise total
production capacity to 2.4mn tons by end of 2009. The Company is currently studying
the possibility of further expanding its capacity by another 0.5mn tons. This is still in the
tentative stage and thats why we have not factored it into our forecast.
The value of APOTs shares derived from the weighted average of the DCF and relative
valuation methods is JD61 per share. The stock closed at JD49.49 on the Amman Stock
Exchange at the end of trading on 23rd September 2008, which implies that the weighted
average value of APOTs shares is at a premium of 24.2% to the shares current market
price. At their current price, APOTs shares have a P/E multiple of 18.1x and 8.2x for
2008 and 2009 respectively. We therefore recommend a BUY on the Arab Potash
Companys stock at its prevailing price levels.
Table 01: Investment Indicators for Arab Potash Company
CMP (JD) Shares in Issue (mn) M-Cap (JDmn) 52-Week Low/High (JD)
49.49 83.3 4,123.4 16.79 / 95.61
Year
Gross Profit Net Profit EPS BVPS ROAE P/E P/BV
(JD 000) (JD 000) (JD) (JD) (%) (x) (x)
2009 (F) 685,832 501,023 6.0 11.7 36% 8.2 4.2
2008 (F) 319,532 227,537 2.7 6.6 30% 18.1 7.5
2007 (A) 137,126 150,191 1.8 4.7 32% 19.4 7.5
2006 (A) 87,129 39,138 0.5 3.2 12% 23.4 3.4
Source : Company Reports & Global Research.
** Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are based
on closing prices on the Amman Stock Exchange as of 23rd September, 2008.
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Chart 01: Share Price Performance of Arab Potash
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ASE Index (LHS) APOT Price-JD (RHS)
Source: Zawya
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Arab Potash Company
Arab Potash Company (APOT) is a Jordan-based manufacturer and supplier of potash
primarily for use in agriculture. The company was formed in 1956 as a pan-Arab business
venture and has a 100-year concession from the government of Jordan to manufacture and
market mineral products derived from the Dead Sea. The Company, together with its affiliates,
produces a range of minerals, such as potassium chloride, potassium nitrate, industrial salt,
bromine and fertilizers. The company currently has a potash production of 1.9mn tons which
the company plans to expand to 2.4mn tons by the end of 2009.
The Company currently employs 1,933 employees distributed across its offices and sites.
Moreover, the Company made great advancements in the information technology field in
terms of planning and infrastructure. It has achieved many ISO awards due to its regulations
of quality, environmental, and safety management.
Chart 02: Capacity Expansions at APOT
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1983 1987 1994 Current 2009
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Source: Company Reports & Global Research
Its subsidiaries and affiliates include Numeira Mixed Salts and Mud Company, Jordan
Dead Sea Industries Company, Jordan Magnesia Company, Arab Fertilizers and Chemicals
Industries Ltd. (KEMAPCO), Jordan Bromine Company, Jordan for Investment and South
Development and Nippon Jordan Fertilizers Company. Arab Potash Company PLC is
headquartered in Amman.
Arab Fertilizers and Chemicals Industries- This company, founded in 1998, was a joint venture
with Kemira Agro of Finland; it produces 150,000tpa of potassium nitrate fertilizer and
75,000tpa of Di-calcium phosphate animal feed supplement. In February 2007, the Company
acquired 50% more shares of Arab Fertilizers and Chemicals Industries (KEMAPCO) thereby
becoming the sole shareholder of KEMAPCO.
Numeira Mixed Salts and Mud Company - APOT owns 100% of this company founded
in 1997, producing mixed salts and Dead Sea Mud for the cosmetics industry - this
company has 60 clients for its cosmetic mud in Jordan alone.
Jordan Dead Sea Industries APOT owns 100% of this company, which is currently inactive.
The company is engaged in the production of 50,000tons of Tetra Bromo bi-sphenol and
35,000tons of calcium bromide.
Chart 03: APC Subsidiaries/Associates/Affiliates
100% Ownership 55.30% Ownership 100% Ownership
100% Ownership 50% Ownership
45.45% Ownership
20% Ownership 20% Ownership
Arab Fertilizers and
Chemicals Industries
Jordan Bromine
Company
Jordan Magnesia
Company
Jordan Investment and
South Devp
APC Subsidiaries/Associates/Afliates
Jordan International
Chartering Company
Nippon-Jordan
Fertilizer Company
Jordan Dead Sea
Industries
Numeira Mixed Salt
and Mud Company
Source: Zawya & Company Reports
Jordan Magnesia Company - APOT owns 55.3% of this company, which is currently inactive.
Founded in 1997, the company is dedicated to the production of 60,000tpa of magnesium
oxide and magnesium hydroxide; the start-up investment cost was US$100mn.
Jordan Bromine Company - APOT owns 50% of this company. The Companys share
in Jordan Bromine profit is 30%, and 50% in losses and liabilities as stated in the share
agreement signed with Albarmarle Holding Company. This company is a joint venture with
Albemarle Holdings Company of the United States, dedicated to producing bromine and
bromine derivatives, including 50,000tpa of bromine; 25,500tpa of tetra bromo bi-sphenol-
A (TBBP-A), used as a flame retardant; 40,000tpa of calcium bromide, which is used in the
oil drilling industry; 10,000tpa of sodium bromide, used in photography; and 2,500 TPY of
hydrogen bromide.
Nippon Jordan Fertilizers Company - APOT has a 20% stake in this joint venture along
with ZEN-NOH, Mitsubishi Kasei, Asahi and Mitsubishi Corporations 60%; and Jordan
Phosphate Mines (JPMC) 20%; it produces 300,000tpa of NPK fertilizer and DAP Fertilizer
and operates a port facility in Aqaba. It began production in 1997.
Jordan International Chartering Company - APOT has a 20% stake in the company. JICC
opened its doors for the first time on 3 August. Its formation brought together into one
company four major shipping and fertilizer interests, as the shareholders in the new company
are Jordan National Shipping Lines, Jebsen International, Jordan Phosphates Mine Co. and
Arab Potash Company.
Shareholding
The major shareholder in the company is PCS Jordan LLC a wholly owned subsidiary of Potash
Corporation of Saskatchewan, a Canadian company, which is the worlds largest fertilizer
enterprise, producing the three primary plant nutrients: potash, nitrogen and phosphate. PCS
Jordan LLC acquired 26% of the issued and outstanding common shares of Arab Potash
Company from Jordan Investment Company (JIC) for US$173.8mn. Subsequent to the
acquisition, APOT was 26.88% held by JIC, 27.96% by Potashcorp, 19.96% by Arab Mining
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Company, and the remainder of APOT shares were held by other governments, banks and
individual investors. As part of the acquisition transaction, Potashcorp nominated individuals
to the top four management positions at APOT.
Chart 04: Shareholding Pattern
Public 7.3%
PCS Jordan LLC,
28.0%
Jordan Investment
Corporation, 26.9%
Arab Mining
Company 20.0%
Islamic Development
Bank, 5.2%
Government of Iraq,
4.7%
Libyan Arab Foreign
Investment Company
4.1%
Kuwait Investment
Authority, 4.0%
Source: Zawya
Listing & Trading
The Arab Potash Company APOT, a public shareholding company, was founded and
registered on July 7, 1956. During 1958, the Company was granted a concession from the
Government of Jordan for a period of 100 years. The Company increased its paid in capital
in December 1997 from JD 79,695,000 to JD 83,318,000. The increase was affected through
the issue of Global Depository Receipts (GDRs) on the London Stock Exchange at a price
of US$9.03 for each GDR. Each GDR represents one ordinary share with a nominal value of
JD1 per share.
Table 02: APC on the Amman Stock Exchange
Year Average Daily Volume Closing Price (JD) Market Cap (JD 000)
2005 27,097 13.0 1,083,134
2006 9,394 11.0 916,498
2007 6,648 34.9 2,906,965
2008* 29,797 49.5 4,123,408
Source: Amman Stock Exchange
* Till September 2008
Arab Potash is listed under the ticker APOT on Amman Stock Exchange. In 2007, the
average daily volume traded of the stock was 6,648 shares. For the period 1st January 2008
to 7th September 2008, the average daily volume traded was 29,797 shares. The stock
closed at JD57.5 at the end of trading on 7th September 2008, with a 52-week high/low of
JD16.79/95.61.
Global Fertilizer Industry
Between 2000-07, Global fertilizer production capacity has increased, at a CAGR of 2.8%
to 229.5mn tons in 2007. During the past 7 years, the capacity in the world fertilizer sector
has witnessed a strong y-o-y growth of 6.1% in 2004 and 5% in 2007. The major reason
for growth during these two years was a time-lag between the planning execution and
commencement of production from new expansions. Generally, an expansion takes 20-24
months for completion, while the establishment of new plant takes 30-36 months. Besides,
time duration could vary based on the availability of gas. However, during the remaining
years the y-o-y growth was restricted in the range from 1.5% to 3.2%.
Chart 05: Global Fertilizer Production Capacities
1.3%
3.2%
1.7%
5.0%
6.1%
0.0%
1.6%
1.8%
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2000 2001 2002 2003 2004 2005 2006 2007
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6.0%
7.0%
World Fertilizer Capacities Growth
Source: Company Reports, IFA and FAO
Regional Fertilizer Capacities
During 2000-07, North American and East Asian regions had completely dominated the
world, in terms of production capacities. In 2007, according to International Fertilizer
Industry Association (IFA) statistics, North American and East Asian regions were standing
with the capacities of 39.6mn tons and 68.9mn tons, respectively.
Table 03: Historical Regional Fertilizer Capacities
(000 Tons) 2000 2001 2002 2003 2004 2005 2006 2007
North America 45,525 43,248 42,026 40,307 42,222 39,486 37,700 39,693
LatinAmerica 8,731 9,703 10,385 10,733 11,914 12,086 12,803 11,481
SouthAsia 16,986 17,436 16,957 17,401 18,468 17,592 18,180 17,335
EastAsia 45,109 45,748 48,148 50,794 56,265 61,864 65,990 68,906
CentralEurope 7,301 6,504 5,656 6,703 7,438 7,757 7,239 7,194
WestEurope 17,810 16,759 16,460 16,395 16,351 16,714 15,437 17,209
EastEurope&CentralAsia 25,568 25,666 26,477 27,778 29,168 30,599 31,429 37,912
Oceania 980 1,399 1,366 1,555 1,536 1,614 2,021 2,159
MENA 21,765 23,233 25,262 24,569 24,877 27,151 27,711 27,614
Total 189,775 189,696 192,737 196,235 208,239 214,863 218,510 229,503
Source: Global Research, IFA & FAO
It is worth mentioning that in past 7 years, North America is the only region that has
shown a significant decline in capacity to 39.6mn tons in 2007 from 45.5mn tons in 2000.
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Consequently, the contribution of the region to the overall world capacity has declined to
17.3% in 2007 from 24.0% in 2000. This decline is mainly due to (1) higher gas prices and (2)
decline in local demand. However, on a y-o-y basis, North America capacity had registered
an increase of 5.3% in 2007. During the corresponding period, East Asian capacities had
shown an upward trend and increased at a CAGR of 6.2%, raising the East Asian regions
share to 30.0% of the total worlds capacity in 2007, as compared to 23.8% in 2000.
Table 04: Regional Contribution
(%) 2000 2001 2002 2003 2004 2005 2006 2007
North America 24.0% 22.8% 21.8% 20.5% 20.3% 18.4% 17.3% 17.3%
Latin America 4.6% 5.1% 5.4% 5.5% 5.7% 5.6% 5.9% 5.0%
South Asia 9.0% 9.2% 8.8% 8.9% 8.9% 8.2% 8.3% 7.6%
East Asia 23.8% 24.1% 25.0% 25.9% 27.0% 28.8% 30.2% 30.0%
Central Europe 3.8% 3.4% 2.9% 3.4% 3.6% 3.6% 3.3% 3.1%
West Europe 9.4% 8.8% 8.5% 8.4% 7.9% 7.8% 7.1% 7.5%
East Europe & Central Asia 13.5% 13.5% 13.7% 14.2% 14.0% 14.2% 14.4% 16.5%
Oceania 0.5% 0.7% 0.7% 0.8% 0.7% 0.8% 0.9% 0.9%
MENA 11.5% 12.2% 13.1% 12.5% 11.9% 12.6% 12.7% 12.0%
Fertilizer Capacity Expansion
According to Food & Agriculture Organization of the United Nations (FAO), fertilizer
capacity, during 2007-11 is expected to increase at a CAGR of 5.0% to 278.6mn tons by
2011. The major increase in the world capacity expansion is expected to come from the
MENA region, which is expected to show 2007-11 CAGR of 19.9% to reach at 57.1mn
tons in 2011 from the current level of 27.6mn tons in 2007. In addition, the contribution
from MENA to total world capacity is expected to reach at 20.5% in 2011 up from 12.0% in
2007.
Chart 06: Global Fertilizer Capacity Growth
5.0%
7.2%
4.2%
3.9%
4.5%
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8.0%
World Fertilizer Capacities Growth
Source: Global Research, IFA and FAO
Global Production of Fertilizer
Global fertilizer production, by the end of 2007, stood at 232.6mn tons. During 2000-07,
fertilizer production has increased at a CAGR of 2.2%. As North American and East Asian
regions have the highest fertilizer capacities in the world, they have unsurprisingly maintained
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their dominance in the production. However, the consumption of fertilizer remained high in
areas where agriculture is the backbone of the economy and life in general like, South Asia
and Central, East and West Africa. These countries as a result rely on the import of fertilizer
products to fulfill their local requirement.
Chart 07: Global Fertilizer Production
1.3%
3.2%
1.7%
1.1%
1.8%
1.6%
0.0%
6.1%
180.0
190.0
200.0
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240.0
2000 2001 2002 2003 2004 2005 2006 2007
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7.0%
World Fertilizer Production Growth
Regional Fertilizer Production
According to IFA statistics, North American and East Asian regions are the two biggest
producers of fertilizers. The combined production from these regions stood at 108.6mn tons
out of the entire production of 232.6mn tons in 2007.
Table 05: Regional Fertilizer Production
(000 Tons) 2000 2001 2002 2003 2004 2005 2006 2007
North America 47,921 45,525 44,238 42,428 44,444 41,564 39,684 39,684
Latin America 9,191 10,214 10,931 11,298 12,541 12,722 13,477 13,477
South Asia 17,880 18,354 17,850 18,317 19,440 18,517 19,137 19,137
East Asia 47,484 48,155 50,682 53,468 59,226 65,120 69,463 69,463
Central Europe 7,685 6,846 5,954 7,055 7,829 8,165 7,620 7,620
West Europe 18,747 17,641 17,327 17,258 17,212 17,594 16,250 16,589
East Europe & Central Asia 26,914 27,016 27,870 29,240 30,703 32,209 33,083 32,831
Oceania 1032 1,472 1,438 1,636 1,616 1,699 2,127 2,004
MENA 22,910 24,456 26,592 25,862 26,186 28,579 29,170 31,756
Total 199,763 199,679 202,882 206,562 219,198 226,170 230,012 232,562
Since production is linked with capacity, the production from the North American region
has shown a decline of y-o-y 17.2% to 39.7mn tons in 2007 as compared to 47.9mn tons in
2000. On the other hand, remarkable y-o-y growth of 46.3% and 38.6% was witnessed in
the East Asian and MENA regions. This was mainly due to (i) the intentions of Middle East
governments to reduce the economic dependence on crude oil, (ii) the abundance of natural
gas has encouraged the North African and Middle Eastern countries to invest in gas based
industries and (iii) the high demand of fertilizer in Asian countries and ample gas in China
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and Indonesia has led East Asian countries to increase the production. Consequently, the
contribution from the MENA region has lifted from 11.5% in 2000 to 13.7% in 2007 and East
Asian region has claimed 29.9% of total production in 2007 against 23.8% in 2000.
Table 06: Regional Production Contribution
(%) 2000 2001 2002 2003 2004 2005 2006 2007
North America 24.0% 22.8% 21.8% 20.5% 20.3% 18.4% 17.3% 17.1%
Latin America 4.6% 5.1% 5.4% 5.5% 5.7% 5.6% 5.9% 5.8%
South Asia 9.0% 9.2% 8.8% 8.9% 8.9% 8.2% 8.3% 8.2%
East Asia 23.8% 24.1% 25.0% 25.9% 27.0% 28.8% 30.2% 29.9%
Central Europe 3.8% 3.4% 2.9% 3.4% 3.6% 3.6% 3.3% 3.3%
West Europe 9.4% 8.8% 8.5% 8.4% 7.9% 7.8% 7.1% 7.1%
East Europe & Central Asia 13.5% 13.5% 13.7% 14.2% 14.0% 14.2% 14.4% 14.1%
Oceania 0.5% 0.7% 0.7% 0.8% 0.7% 0.8% 0.9% 0.9%
MENA 11.5% 12.2% 13.1% 12.5% 11.9% 12.6% 12.7% 13.7%
Higher Capacity Leads Production Growth...
According to FAO, world fertilizer production is expected to increase at a CAGR of 3.1% to
262.6mn tons, during the period of 2007-11. Major production growth is expected from the
MENA region, where production is expected to increase at a CAGR of 13.5%. As a result,
the region could well become the 2nd largest fertilizer producer in the world by 2011.
Table 07: Production Growth
(000 Tons) 2007 2008E 2009E 2010E 2011E
North America 39,684 39,684 39,684 39,684 39,684
Latin America 13,477 13,477 13,477 13,477 13,477
South Asia 19,137 19,137 19,137 19,137 19,137
East Asia 69,463 69,463 69,463 69,463 69,463
Central Europe 7,620 7,620 7,620 7,620 7,620
West Europe 16,589 17,209 17,209 17,209 17,209
East Europe & Central Asia 32,831 38,397 39,242 40,329 41,050
Oceania 2,004 2,209 2,209 2,209 2,209
MENA 31,756 35,268 36,542 47,872 52,764
Total 232,562 242,465 244,584 257,001 262,614
Global Fertilizer Consumption
The overall consumption of fertilizer in 2007 reached 237.4mn tons against the total
production of 232.6mn tons. Among the regions, South & East Asia regions remained the
largest consumer of fertilizer by consuming 52.5% of the total world consumption level. In
addition, the region has produced 88.6mn tons, while consuming 124.7mn tons in 2007. This
shows that these regions mostly rely on imports. Besides, South & East Asia regions, Latin
American and West European regions has witnessed a deficit of 9.6mn tons and 5.5mn tons
respectively in 2007, which were fulfilled through imports.
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Chart 08: Regional Fertilizer Consumption in 2007
East Asia, 37%
Oceania, 2%
East Europe &
Central Asia, 3%
Africa, 3%
North America,
15%
Latin America,
10%
West Aisa-ME,
3%
South Asia, 16%
Weat Europe, 9%
Central Europe,
2%
Based on FAO statistics, despite the shortage of fertilizer in Latin America, South Asia,
and East Asia regions, the global utilization rate is expected to fall from the present rate of
101.3% to 94.3% by 2011. This is mainly due to the higher increase in production capacities
at a CAGR of 4.6%, as compared to the demand CAGR of 2.4%, during 2007-11. However,
keeping the utilization rate at 100% will probably create an over supply situation by 2010.
Chart 09: Global Fertilizer Consumption Growth
101.3%
94.3%
101.7%
98.4%
96.4%
225.0
230.0
235.0
240.0
245.0
250.0
255.0
260.0
265.0
2007 2008E 2009E 2010E 2011E
(
m
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T
o
n
s
)
90.0%
92.0%
94.0%
96.0%
98.0%
100.0%
102.0%
104.0%
Fertilizer Consumption Utilization Rate
Fertilizer Product Prices
Over the last 2 years, international fertilizer prices have surged mainly due to higher feedstock
prices in North America, Europe, and East Asia. In addition, no subsidy is given in these
regions on feedstock prices. Consequently, the price of basic fertilizer chemicals in these
regions has witnessed an increase of 35.8% in phosphoric acid while Sulphuric acid prices
have jumped from US$75.1 per ton in 2005 to US$96.9 per ton in 2007. However, in the
MENA region, the feedstock gas is available at highly subsidized rates and does not depend
on the prices of gas in the international market. This is mainly due to ample production and
supply of gas in MENA region and agricultural base economy of South Asia region.
-|+c lct+s| tcap+a :epteace| !))~ 1!
Chart 10: Fertilizer Product Prices
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2005 2006 2007 2008E 2009E 2010E 2011E
(
U
S
$
/
T
o
n
)
Ammonia Urea DAP
Looking ahead, the expected increase in gas prices will not allow fertilizer products prices to
come down from their present high levels, since the price of feedstock gas in the international
market is directly linked with international prices. However, the availability of gas (feedstock)
at highly subsidized prices in the MENA region, with low local consumption, will benefit
the region to earn more profits by exporting the fertilizer at international rates. Moreover,
South Asian countries have also subsidized the price of gas (feedstock) but the high local
consumption has caused these countries to rely on the import. Consequently, the region was
not be able to reap the benefit of high fertilizer prices.
Global Potash Industry
Globally the year 2008 is proving to be another year of strong growth for the fertilizer
industry. World production of potash, the primary inputs into the fertilizer production process,
continued to grow, reaching 55.7mn tons respectively in 2007, compared to production levels
of 42.6mn tons back in year 2001.
Potash production in 2007 was an all time record with almost 80% of the increase coming
from Canada and the remainder from Russia and Belarusia. Other producing regions were
reported operating at their full capacity.
Chart 11: Global Potash Demand & Supply
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007
(
m
n

T
o
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s
)
(0.5)
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
(
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T
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n
s
)
Demand (LHS) Supply (LHS) Surplus/Decit (RHS)
Source: Arab Potash Annual Reports
Potash demand and deliveries increased to 55.9mn tons of product from about 48.6mn. The
increase was relatively large at 7.3mn tons or about 15%. A very significant development
was the fact that growth was registered in all regions and almost all countries. The largest
growth regions were Asia (22%), North America (15%), and Latin America (12%).The other
regions of the world witnessed more modest figures. The drivers for demand were the firmer
prices for agricultural commodities almost universally and support for higher acreage even
in Europe where set aside policies were reversed.
The main drivers creating tight supply & demand for potash are really quite simple.

Worlds population is growing every year. U.N. estimates are 100 million a year.
This growing population for the first time desires a higher protein diet (more meat).
Meat production is grain intensive. It takes 7 pounds of grain to produce 1 pound of beef
according to the USDA.
There is less arable land on which to grow crops as a result of the growing population.
Therefore, in order for countries to feed their hungry populations they must increase the
yields and efficiency of the farm land already in use. This is done in part by use of fertilizers
such as potash.
-|+c lct+s| tcap+a :epteace| !))~ 1+
The Bio Fuel factor did play a role in the overall demand but estimates of the real significance
of this sector in the use of potash fertilizer vary from 2-3% in the current decade, with some
projections of 5% of total Potash demand in the middle of the next decade. Potash deliveries
were higher to China where imports are estimated to have risen by more than 28%. A similar
growth rate was registered in India. There were also sharp increases of deliveries to Brazil
and the United States. Demand also improved in Europe after a decade of reduced fertilizer
use.
Going forward, the global production of the commodity could rise to as high as 85bn gallons
per annum by 2015 from the current 30bn gallons per annum.
Chart 12: World Potash Prices (US$/Ton)
-
100
200
300
400
500
600
700
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
*
J
a
n
-
0
8
F
e
b
-
0
8
M
a
r
-
0
8
A
p
r
-
0
8
M
a
y
-
0
8
J
u
n
-
0
8
J
u
l
-
0
8
A
u
g
-
0
8
0%
20%
40%
60%
80%
100%
120%
140%
160%
Annual Potash Price (LHS) Annual Growth (RHS)
Monthly Growth (RHS) Monthly Potash Prices (LHS)
Source: World Bank Pink Sheets
*Average (Jan-August)
During 2007, potash market prices remained favorable for suppliers. In 2007, average global
potash price was US$200.2/ton as compared to US$174.5/ton in 2006.However the same for
the year 2008 (Jan-August) has gone significantly to as high as US$479.6/ton, an increase
of 140%.
The commodity price surge which motivated farmers to increase efficiency by balanced
nutrient use is viewed as a structural adjustment as the worlds population becomes more
prosperous and requires better and more diversified food. This demand growth resulted in
record low grain inventories estimated at approximately 57 days of consumption.
Chart 13: World Potash Price Forecasts (US$/Ton)
-
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
1,600.0
2008F 2009F 2010F 2011F 2012F
0%
20%
40%
60%
80%
100%
120%
Price Growth
Source: Global Research
Indian and Chinese contract prices of Potash effective July 1, 2008 has risen to US$625/ton
and US$580/ton respectively. While spot market prices for deliveries in fourth quarter are
US$1000/ton. These price increases are driven by the continuous growth of global demand,
historically low inventory levels and unprecedented tightening of the supply for the remainder
of 2008 after the agreements reached by the Company in China and India.
Going forward, the tightness of the supply/demand balance of potash and phosphate will
begin to ease by 2011. As per the management and the industry source, the average annual
price is expected to come to JD286/ton (US$405/ton), which for the year 2009, would peak
to JD600/ton (US$850/ton) and by the end of 2012, the price would ease down at JD990/ton
(US$1400/ton).
-|+c lct+s| tcap+a :epteace| !))~ 1e
Jordan Potash Industry
Jordan is a country rich in potash deposits. Total production of potash in 2007 reached 1.79mn
tons, as per the Central Bank of Jordan. Potash is used in the production of fertilizers. The
country is therefore a major DAP fertilizer exporter and it exports to more than 25 countries,
but mainly to India, Japan and Pakistan, while the Japanese market is the main exporter of
the Jordanian NPK.
Chart 14: Jordan Potash Exports as % of Total Manufacturing Exports
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
2002 2003 2004 2005 2006 2007
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Potash Exports (JD 000) Exports of Manf. Goods Potash as % of Total Manf.
Source: Central Bank of Jordan
On the whole, the value added to GDP by the mining and quarrying sector has been
continuously declining, despite soaring prices. The contribution to the real GDP is around
JD128mn as compared to JD130mn in 2006. This drop is attributable to the continuous
decline in production of these minerals, with phosphate production declining by 13% and
potash declining by 2%.
Chart 15: Jordan Potash Export Distribution by Region
India, 26%
China, 17% Others, 16%
Malaysia &
Indonesia, 19%
Asia, 13%
Europe &
Africa, 9%
Source: Annual Report of APC
Arab Potash Company is the only company dedicated for the production of Potash in Jordan.
Over the years Jordan has exported more than 90% of its products to countries like China,
India, Malaysia, Indonesia and other Asian countries. The country could be able to export
and earn more as APOT is undergoing expansion and the full year impact would come in
2010, whereby it could be able to produce more than 2.4mn tons of Potash.
Competitors Profle
The Mosaic Company
Mosaic is one of the worlds leading producers and marketers of concentrated phosphate
and potash as well as a supplier of nitrogen, all of which are vital crop nutrients. Its potash
production capabilities are the second-largest in the world, with an annual capacity of
approximately 10.4mn tons. They operate four mines within Saskatchewan, Canada,
including the worlds largest potash mine, as well as a mine in New Mexico. North America
receives about 56% of their shipments. The remainder is exported to other regions of the
world. Their global market share of potash is approximately 15%. Their production of 7.9mn
tons of potash for fiscal 2007 accounted for approximately 15% of world production and 40%
of North American production.
Chart 16: Potash Production by Mosaic
(
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)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2004 2005 2006 2007
Source: APC Annual Reports
Belaruskali
Belaruskali is second largest producer of Potash. Functioning on the basis of the Starobin
deposit of the potash salts, PA Belaruskali comprises the four mine and refinery complexes,
auxiliary shops and servicing units which employ about 20 000 persons. Each of the four mine
and refinery complexes comprises a mine to mine the potash ore and the dressing factory to
process it and to produce the mineral potash fertilizers in the form of fine, fine crystallized and
granulated concentrate of the potassium chloride. Except this, the Amalgamation produces
the cooking salt, technical salt, edible salt and feeding salt.
-|+c lct+s| tcap+a :epteace| !))~ 1~
Chart 17: Potash Production by Belruskali
(
m
n

T
o
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s
)
7.3
7.4
7.5
7.6
7.7
7.8
7.9
8.0
8.1
8.2
8.3
2004 2005 2006 2007
Source: APC Annual Reports
:epteace| !))~ -|+c lct+s| tcap+a 1)
APOT Performance Overview
Recent Developments in Arab Potash Company
Aqaba Development Corporation signed a 30-year Build, Operate and Transfer (BOT)
agreement with Jordan Phosphate Mines Company (JPMC) and the Arab Potash Company
(APOT), the two main users of the Industrial Terminal, to rehabilitate, develop, and
operate the current Industrial Terminal as well as establish and operate a new terminal on
a B.O.T basis at an Investment of US$100mn.
Arab Potash Company announced that its Board of Directors has approved the closure
of its Salt Unit. The Company has reached an agreement with the General Federation of
Jordanian Trade Unions and the Ministry of Labor, under which it will pay a severance
package of JD3mn to approximately 140 Salt Unit employees. Around 60 Salt Unit
employees will be absorbed into the potash operations.
Arab Potash Company announced that it will enter a joint venture with Jordan Petroleum
Refinery Company to establish a new company, which will invest JD70mn to rehabilitate
the existing jetty and construct a new jetty in a period of 3 years. Both companies will
own a 50% stake in the newly established company.
The company announced that it is planning to sell from 40% up to 100% of its stake in
Arab Fertilizers and Chemicals Industries to local or foreign investors.
Financial Performance in 2007
Sales Revenue
The Companys sales revenue increased by 41% in 2007 to JD291mn as compared to
JD207mn in 2006, an increase of over 40%. This increase was possible because of increase
in the sales volume which was also aided by the rising prices. During 2007, the company was
able to sell 1.85mn tons of Potash, higher by 13% as compared to that in 2006. During 2007,
the Potash price increased by 8% to JD136/ton as compared to JD126/ton in 2006.
Chart 18: Revenue Contribution
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2004 2005 2006 2007
(
J
D

0
0
0
)
Potash Sales Revenue Numeria Company Revenue KEMAPCO Revenue
-|+c lct+s| tcap+a :epteace| !))~ !)
Potash exports amounted to 90% of the total sales, out of which a majority was exported
to India and China. Sales to India amounted to 29% of the total exports while the same for
China was 19%. Other major destinations for Potash were Malaysia and Indonesia. Revenue
earned by Numeria and KEMPACO amounted to 13% of the total. Numeria revenue declined
to JD0.368mn in 2007 from JD0.523mn in 2006. While this was the first time when revenue
from KEMPACO was added to the top line. KEMPACO added almost 13% to the total at
JD37.8mn.
Gross Profit
In 2007, the Companys cost of sales rose by 28% to JD154mn as compared to JD120mn
in 2006. Cost of Potash business declined during the year and the company was able to
complement its potash margins by 9% to 51% from 42% in 2006. On the other hand the
margins of Numeria declined heavily to as low as 8% from 41% a year ago. Margins of
KEMPACO remained at 22% for 2007. On the whole the Potash business added 81% to the
total cost while KEMPACO added 19% to the total.
Chart 19: Cost Contributions
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2004 2005 2006 2007
(
J
D

0
0
0
)
Arab Potash Company Cost Numeria Company Cost KEMAPCO Cost
As a result of lesser growth in cost of sales as compared to that of revenue, the gross profit
rose by 57% to JD137mn as compared to JD87mn in 2006. During the year the margins of
the company increased to 47% from 42% in 2006. This growth in margins was because of the
extraordinary increase in the margins of Potash business.
Operating Expense & Profit
The Companys operating expense on the whole rose by 40% to JD33.6mn in 2007 as
compared to JD24mn in 2006. Selling and distribution expense increased by 98% to JD12.5mn
while general and administrative expense increased by 36% to JD7.1mn. The Royalty to the
Government of Jordan amounted JD13.9mn compared to JD12.4mn in 2006, an increase
of 12.1%, representing 4.8% of consolidated sales revenue for 2007 against 6.0% for 2006.
Under the terms of the concession, the Government of Jordan is entitled to a royalty of JD 8
for each ton of potassium chloride, (Potash) exported by the Company which recently has
been raised to JD15/ton effective March 2008. The maximum royalty payable is limited to
25% of the Companys profit for the year. As a result, the company operating profit rose by
64% to JD103mn (Operating Margins: 35.5%) as compared to JD63mn (Operating Margins:
30.5%) in 2006.
:epteace| !))~ -|+c lct+s| tcap+a !1
Other Revenues
The company earns other income from varied sources which include: interest & commission
income, return on cash deposits, foreign exchange activities and share of profit from associates.
In 2007, huge profits were earned from these sources which amounted to JD75.8mn as
compared to JD6.9mn in 2006. During the year, company profit from associates amounted
to JD9mn as compared to JD5.6mn in 2006. In 2007, the company recorded one time gains
from gains of Jordan Magnesia Company and reversal of provision which amounted to
JD43.8mn.
Net Income
Net income of the company for the year rose from 284% to JD150mn (EPS: JD1.80) as
compared to JD39.13mn (EPS: JD0.47) in 2006. Net margins of the company rose heavily
in the wake of extraordinary income earned through other sources. As a result, the company
net margins for 2007, rose from 18.9% in 2006 to 51.5% in 2007.
Chart 20: Quarterly Revenue & Profits
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
1
Q
/
2
0
0
6
2
Q
/
2
0
0
6
3
Q
/
2
0
0
6
4
Q
/
2
0
0
6
1
Q
/
2
0
0
7
2
Q
/
2
0
0
7
3
Q
/
2
0
0
7
4
Q
/
2
0
0
7
1
Q
/
2
0
0
8
2
Q
/
2
0
0
8
(
J
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'
0
0
0
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
(
%
)
Revenue Net Prot NPM
Source: Company Reports
During first quarter of 2007, the company earned the most at JD52.4mn at margins of 78%,
while the least profitable was the third quarter in which the company earned JD21.8mn.
Assets
The Companys assets rose by 36% to JD543mn as compared to JD400.4mn in 2006. During
the year the major increase was witnessed in the project in progress account which rose
by 111% to JD76.2mn as compared to JD36.1mn in 2006. The increase in the project was
because of the undergoing expansion of the potash business. Receivables and inventories
increased during the year by 60% and 80% to JD97.9mn and JD12.5mn in 2007. Other assets
rose significantly during 2007 to JD47.9mn.
-|+c lct+s| tcap+a :epteace| !))~ !!
Chart 21: Debt to Equity
-
100,000
200,000
300,000
400,000
500,000
600,000
2003 2004 2005 2006 2007
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Assets (JD' 000) Equity as % of Assets Debt as % of Assets
Company liabilities amounted to 28% of the assets. In the total liabilities debt amounted to
43% of the total at JD66mn while the rest were the payables and other liabilities. Various
international institutions have lent funds to the company and the majority amounting to
JD36.9mn was given by Islamic Development Bank Jeddah.
Investments
The Companys investments for the year 2007 rose marginally by 4% to JD35.7mn as
compared to JD34.4mn in 2006. Majority of its investments are in the associates which
amount to 97% of the total. Available for Sale Investments amount to only 3% of the total
investments. Company investments as percentage to assets declined from 9% in 2006 to 7%
in 2007.
Chart 22: Investments as % of Assets
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2003 2004 2005 2006 2007
(
J
D
'

0
0
0
)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
(
%
)
Investments Investment Income as % of Assets
:epteace| !))~ -|+c lct+s| tcap+a !
Gross Margins (%)
40%
43%
46%
49%
52%
55%
2003 2004 2005 2006 2007
Net Margins (%)
-40%
-25%
-10%
5%
20%
35%
50%
2003 2004 2005 2006 2007
Debt to Equity (%)
15%
20%
25%
30%
35%
40%
2003 2004 2005 2006 2007
Operating Margins (%)
20%
24%
28%
32%
36%
40%
2003 2004 2005 2006 2007
Return on Avg. Assets (%)
-20%
-13%
-6%
1%
8%
15%
22%
2003 2004 2005 2006 2007
Return on Avg. Equity (%)
-25%
-15%
-5%
5%
15%
25%
35%
2003 2004 2005 2006 2007
Assets (JD ' 000)
300,000
350,000
400,000
450,000
500,000
550,000
2003 2004 2005 2006 2007
Net Prot (JD ' 000)
(55,000)
(30,000)
(5,000)
20,000
45,000
70,000
95,000
120,000
145,000
2003 2004 2005 2006 2007
P/Bv Ratio (x)
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2003 2004 2005 2006 2007
P/E Ratio (x)
(10.0)
-
10.0
20.0
30.0
40.0
2003 2004 2005 2006 2007
Chart Gallery
-|+c lct+s| tcap+a :epteace| !))~ !+
1H-2008 Performance
The Companys sales revenue for the half year period of 2008 rose by 70.8% to JD234.7mn
as compared to JD137.4mn in the same period of 2007. Potash sales volumes in the first half
of 2008 were 0.93mn tons as compared to 0.93mn tons in 2007, virtually unchanged from
the same period last year. Average sales prices in the first half of 2008 were 65% higher than
in the same period last year. These higher prices resulted in a JD80.0mn increase in potash
sales revenue on a y-o-y basis. The Company sold 85k tons of potassium nitrate (NOP)
and di-calcium phosphate (DCP) during the period which resulted in sales revenues of
JD35.7mn.
Potash cost of sales on a per ton basis increased by 40% as compared to the first six months
of 2007 primarily due to increased energy and freight costs. The higher sales prices more than
offset the increased costs on a per ton basis resulting in an increase in gross profit from potash
of JD52.7mn or 88%. On the whole gross profit rose by 96% to JD126mn (Gross Margins:
54%) as compared to JD64.6mn (Gross Margins: 47%) in 1H-2007.
Table 08: Arab Potash Company - Interim Results
(JD 000) 1H-2007 1H-2008 % Change
Sales Revenue 137,460 234,787 70.8%
Cost of Sales (72,842) (108,138) 48.5%
Gross Profit 64,618 126,649 96.0%
Operational Expenses (18,148) (22,195) 22.3%
Operating Profit 46,470 104,454 124.8%
Other Revenue 64,949 7,907 -87.8%
Financial Charges (1,907) (1,983) 4.0%
Other Expense (1,428) (6,320) 343%
Profit Before Zakat 108,084 104,058 -3.7%
Income Tax (10,108) (13,992) 38.4%
Net Profit 97,976 90,066 -8.1%
2007 1H-2008 % Change
Equity 388,961 420,752 23.5%
Liability 154,263 145,446 36.4%
Assets 543,224 566,198 26.4%
Debt 66,024 62,169 -6%
Debt as % of Assets 12% 11.0%
Investments 35,747 36,184 1%
Investments as % of Assets 7% 6%
Potash selling and distribution expense during the first six months of 2008 as compared to
2007 increased by JD0.6mn (14%). Selling expenses related to KEMPACO were JD2.0mn in
the period. Administrative expenses increased by JD0.7mn (19%) primarily due to increased
legal costs. KEMPACOs administration expenses for the period were JD0.1mn. The royalty
to the Government of Jordan increased by JD3.7mn (53%) due to an increase in the royalty
from JD 8 per exported ton to JD15 per exported ton which was effective from March 17,
2008.
Finance costs recorded a marginal 4% rise during the first half of 2008, to reach JOD1.98mn
up from JD1.91mn in 1H-2007. Finance expenses were considerably high in 2007 due to the
consolidation with KEMAPCO; these increased by 86% to settle in at JD4.2mn compared to
JOD2.3mn in 2006.
The reason for a decline in the other revenue earned by Arab Potash in the second quarter
of 2007 was that the Company received a settlement related to the Jormag litigation that
resulted in a net gain of JD24.9mn in 2007. In addition, the Company had recorded a gain
of JD30.9mn in the first quarter of 2007 related to the transaction whereby the Company
purchased the remaining 50% of the shares of KEMPACO from Kemira Agro. These one-
time gains were not repeated in the first half of 2008.
Profit before tax was JD104.1mn as compared to JD 108.1mn in the first half of last year.
The significant improvement in income from continuing operations almost completely offset
the reduction in one-time gains realized in 2007. On the whole, the Company reported net
income of JD90.1mn (EPS: JD1.08) for the first half of 2008 as compared to JD98.0mn
(EPS: JD1.17) in the same period of 2007.
During the half year period, the net assets of the company increased by 26.4% to JD566mn
as compared to JD543mn at the end of 2007.
During the 1H-2008, the projects under progress increased by 29% to JD98.3mn up from
JD76.3mn in 2007. The figure pertains to the expansion plans taking place aiming at
increasing the companys production capacity by 0.5mn tons to reach 2.4mn tons.
The company equity proportion to that of sales rose from 72% at the end of 2007 to 74% at
the end of the half year period. Total debt amounted to JD62mn as compared to JD66mn at
the end of 2007. The company reduced its debt as a percentage of assets to 11% from 12%
last year.
The Company has reached agreement with major customers in India (IPL and Zuari) regarding
tonnages and prices for the remainder of this year and first quarter of 2009. Quantities will
approximate 600,000tons at base prices that are approximately US$355/ton higher (US$625/
ton CFR). In addition, the Company reached an agreement with Sinochem to supply it with
200,000tons during the remainder of 2008 at prices that are US$400/ton higher.
-|+c lct+s| tcap+a :epteace| !))~ !e
Outlook
Arab Potash Company is expected to remain buoyant. Global prices for potash are not
expected to ease any time soon, as strong global demand for fertilizers has intensified driven
by the population and economic growth in emerging economies such as India and China.
In addition, government mandates for bio-fuel production, and higher urbanization and
deforestation rates contributed to increased demand. According to the International Fertilizer
Association (IFA), fertilizer production rose by approximately 10% each year between 2004
and 2007 and demand for potash and phosphate fertilizers are estimated to rise by 3.4% and
2.8% per annum respectively for the next several years.
Looking at the international demand and supply scenario, the demand is outstripping supply
for both potash and phosphates. This led to a continuous price rises of potash and phosphates,
including rock phosphate, throughout 2007, both of which are currently at all time highs. On
the other hand, world demand for potash and phosphate fertilizers exceeds supply. Given the
fact that the development of new production capacity requires approximately a multi-year
process, supply constraints are expected to continue through the medium term.
APOTs management believes that the price will continue to increase and the average prices
of Potash would be over JD650/ton in 2009 but we have remained slightly conservative and
forecasted the price at JD600/ton.
Chart 23: Increasing Revenue
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2008 (F) 2009 (F) 2010 (F) 2011 (F)
(
J
D

0
0
0
)
Potash Sales Revenue Numeria Company Revenue KEMAPCO Revenue
The Company currently produces 1.9mn tons of potash, and is undergoing expansion by
0.5mn tons which is scheduled to come online by second half of 2009. This would raise total
production capacity to 2.4mn tons by end of 2009. The Company is currently studying the
possibility of further expanding its capacity by another 0.5mn tons. However, this is still in
the tentative stage and thats why we have not factored it into our forecast.
The contribution to the sales revenue would be dominated by the Companys Potash business
and with the ever rising prices the average contribution in the revenue of the company would
average around 90% for 2008-2011. On the other hand cost contribution would average
around 83% during the period.
The company recently signed a 30-year Build, Operate and Transfer (BOT) agreement with
Jordan Phosphate Mines Company (JPMC) and the Arab Potash Company (APOT), the
two main users of the Industrial Terminal, to rehabilitate, develop, and operate the current
Industrial Terminal as well as establish and operate a new terminal on a B.O.T basis at an
Investment of US$100mn. The investment would result in cost reduction for the Company
and would make process easier for the Company to channel out its produce.
Chart 24: EV/EBITDA
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
2007 2008 (F) 2009 (F) 2010 (F) 2011 (F)
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
EBITDA (JD 000) EV (JD 000) EV/EBITDA (x)
The company is also expected to earn through the joint venture with Jordan Petroleum Refinery
Company which aims to establish a new company, which will further invest JD70mn to
rehabilitate the existing jetty and construct a new jetty in a period of 3 years. Both companies
will own a 50% stake in the newly established company.
Recently, the company announced that it is planning to sell from 40% up to 100% of its
stake in Arab Fertilizers and Chemicals Industries to local or foreign investors. This has not
materialized so far and thats why we havent incorporated it in our forecasts.
On the whole, the company is a great combination of core incomes through varied business
with a cushion from the non-core income and investments.
-|+c lct+s| tcap+a :epteace| !))~ !~
Valuation and Recommendation
DCF Method
In order to compute the cost of equity for the Discounted Cash Flow (DCF) method, we have
used the Capital Asset Pricing Model (CAPM).
The following assumptions have been made in order to arrive at the DCF value of Arab
Potash Company.
A risk-free rate of 7.03%, has been assumed.
A market risk premium of 5.5% has been assumed.
Beta has been assumed at 1.0.
The cost of equity derived from the above assumptions using the Capital Asset Pricing
Model (CAPM) is 12.53%.
The cost of debt has been assumed at 5%.
Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works
out to be 10.3%.
Terminal growth rate of 3.0% has been assumed, as it is expected to follow the long-term
GDP growth in the region.
Based on our future earnings projections and the above assumptions for DCF computations,
the DCF value of Arab Potash comes out to be JD70 per share.
Table 09: DCF Valuation of Arab Potash Company
(JD 000) 2008 (F) 2009 (F) 2010 (F) 2011 (F)
Free Cash Flow 58,552 164,646 351,678 481,373
Discounted Cash Flows 57,020 145,403 281,647 349,607
WACC 10.3%
Terminal Growth Rate 3.0%
Primary Value 833,677
Terminal Value 6,819,059
Investments 36,184.0 (As of 1H-2008)
Cash 71,098.0 (As of 1H-2008)
Debt 61,997.0 (As of 1H-2008)
Enterprise Value 5,893,449
Equity Value 5,831,452
No. of Equity Shares Outstanding (mn) 83,318
Per Share Value (SR) 70
:epteace| !))~ -|+c lct+s| tcap+a !)
Sensitivity Analysis
A sensitivity analysis for different estimated long-run future growth rates and weighted cost
of capital is shown in table below. The table provides estimated fair values for APOTs
shares based on a range of varying inputs. The shaded area at the center shows the most
probable range of alternatives.
Table 10: Sensitivity Analysis of Arab Potash Company
Terminal Growth Rate

W
A
C
C

1.0% 2.0% 3.0% 4.0% 5.0%
8.3% 73 83 98 119 154
9.3% 64 71 82 96 117
10.3% 56 62 70 80 94
11.3% 50 55 61 69 79
12.3% 46 49 54 60 67
Relative Valuation Method
The peer group valuation is performed to compare the intrinsic value of Arab Potash Company
arrived at using the DCF calculation. In order to value APOT using this method, we have used
the weighted average price-to-earnings (P/E) multiple for a basket of comparable companies,
which make up the peer set for APOT. The price-earnings multiple of a stock is a reflection
of various factors, such as the expected profitability of the company, its growth potential as
perceived by the market, predictability and sustainability of its revenues, the quality of its
earnings and the quality of its management, among others.
To arrive at the peer-set P/E multiple, we have computed the weighted average P/E of the
three companies.
The weighted average forward P/E for the peer set, thus arrived at, is 9.0x. On the basis of
the weighted average forward P/E for the peer set and APOTs projected 2008 earnings, the
companys stock valuation comes to JD27 per share. However, as the price-earnings multiple
varies with time and is dependent on several factors, such as market sentiment and other
qualitative factors, we have provided a lower weightage of 20% to the peer valuation method,
and 80% weightage to the value arrived at using the DCF method.
Valuation
The value of APOTs shares derived from the weighted average of the DCF and relative
valuation methods is JD61 per share. The stock closed at JD49.49 on the Amman Stock
Exchange at the end of trading on 23rd September 2008, which implies that the weighted
average value of APOTs shares is at a premium of 24.2% to the shares current market
price.
-|+c lct+s| tcap+a :epteace| !))~ )
Table 11: Weighted Average Share Value of Arab Potash Company
Weightage Fair Value
As per DCF Method 80% 70
As per P/E Multiple 20% 27
Weighted Average Share Value (JD) 61
At their current price, APOTs shares have a P/E multiple of 18.1x and 8.2x for 2008 and
2009 respectively. We therefore recommend a BUY on the Arab Potash Companys stock
at its prevailing price levels.

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This m a teria l wa s prod u ced by Globa l In vestm en t Hou se KSCC ( Globa l) ,a firm regu la ted by the Cen tra l Ba n k of
Ku wa it. This d ocu m en t is n ot to be u sed or con sid ered a s a n offer to sell or a solicita tion of a n offer to bu y a n y
secu ri ti es. Globa l m a y, from ti m e to ti m e,to the ex ten t perm i tted by la w, pa rti ci pa te or i n vest i n other fi n a n ci n g
tra n sa ction s with the issu ers of the secu rities ( secu rities) , perform services for or solicit bu sin ess from su ch issu er,
a n d/or ha ve a position or effect tra n sa ction s in the secu rities or option s thereof. Globa l m a y, to the exten t perm itted
by a pplica ble Ku wa iti la w or other a pplica ble la ws or regu la tion s, effect tra n sa ction s in the secu rities before this
m a teria l is pu blished to recipien ts.
In form a ti on a n d opi n i on s con ta i n ed herei n ha ve been com pi led or a rri ved by Globa l from sou rces beli eved to
be relia ble, bu t Globa l ha s n ot in depen den tly verified the con ten ts of this docu m en t. Accordin gly, n o represen ta tion
or w a r r a n ty, ex pr ess or i m pli ed , i s m a d e a s to a n d n o r eli a n ce shou ld be pla ced on the fa i r n ess, a ccu r a cy,
com pleten ess or correctn ess of the in form a tion a n d opin ion s con ta in ed in this docu m en t. Globa l a ccepts n o lia bility
for a n y loss a ri si n g from the u se of thi s d ocu m en t or i ts con ten ts or otherwi se a ri si n g i n con n ecti on therewi th.
This d ocu m en t is n ot to be relied u pon or u sed in su bstitu tion for the ex ercise of in d epen d en t ju d gem en t. Globa l
sha ll ha ve n o respon si bi li ty or li a bi li ty w ha tsoever i n respect of a n y i n a c cu ra cy i n or om m i ssi on from thi s or
a n y other d ocu m en t pr epa r ed by Globa l for , or sen t by Globa l to a n y per son a n d a n y su ch per son sha ll be
respon sible for con d u ctin g his own in vestiga tion a n d a n a lysis of the in form a tion con ta in ed or referred to in this
d ocu m en t a n d of eva lu a ti n g the m eri ts a n d ri sk s i n volved i n the secu ri ti es form i n g the su bject m a tter of thi s or
other su ch d ocu m en t.
Opin ion s a n d estim a tes con stitu te ou r ju d gm en t a n d a re su bject to cha n ge withou t prior n otice.Pa st perform a n ce
i s n ot i n d i ca ti v e of fu tu re resu lts. Thi s d ocu m en t d oes n ot con sti tu te a n offer or i n v i ta ti on to su bscri be for or
pu rcha se a n y secu ri ti es, a n d n ei ther thi s d ocu m en t n or a n ythi n g con ta i n ed herei n sha ll form the ba si s of a n y
con tra ct or com m i tm en t wha t so ever. It i s bei n g fu rn i shed to you solely for you r i n form a ti on a n d m a y n ot be
reprod u ced or red istribu ted to a n y other person .
Neither this report n or a n y copy hereof m a y be distribu ted in a n y ju risdiction ou tside Ku wa it where its distribu tion
m a y be restri cted by la w. Person s who recei ve thi s report shou ld m a k e them selves a wa re of a n d a d here to a n y
su ch restriction s. By a cceptin g this report you a gree to be bou n d by the foregoin g lim ita tion s.
Company
Arab Potash Company (APOT)
Recommendation
BUY
Ticker
APOT.ASE
Price
JD49.49
Disclosure
1,10
Disclosure Checklist
1. Global Investment House did not receive and will not receive any compensation from the company
or anyone else for the preparation of this report.
2. The company being researched holds more than 5% stake in Global Investment House.
3. Global Investment House makes a market in securities issued by this company.
4. Global Investment House acts as a corporate broker or sponsor to this company.
5. The author of or an individual who assisted in the preparation of this report (or a member of his/her
household) has a direct ownership position in securities issued by this company.
6. An employee of Global Investment House serves on the board of directors of this company.
7. Within the past year , Global Investment House has managed or co-managed a public offering for
this company, for which it received fees.
8. Global Investment House has received compensation from this company for the provision of
investment banking or financial advisory services within the past year.
9. Global Investment House expects to receive or intends to seek compensation for investment banking
services from this company in the next three months.
10. Please see special footnote below for other relevant disclosures.
The following is a comprehensive list of disclosures which may or may not apply to all our researches.
Only the relevant disclosures which apply to this particular research has been mentioned in the table
below under the heading of disclosure.
Global Rating
Buy
Global Research: Equity Ratings Definitions
Hold
Reduce
Sell
Definition
Fair value of the stock is >10% from the current market price
Fair value of the stock is between +10% and -10% from the current market price
Fair value of the stock is between -10% and -20% from the current market price
Fair value of the stock is < -20% from the current market price
Global Invest ment House
Tel: ( 965) 295 1000 - Fax: ( 965) 295 1005
research @ global.com.kw
www.globalinv.net
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