INSIGHT

September05,2014
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FaujiFertilizerBinQasimLimited
Youcanthaveyourcakeandeatittoo
FaujiFertilizerBinQasim(FFBL)reportednetearningsofPKR754mn(EPS:PKR0.81)
in 2QCY14, up by a significant 15folds QoQ. The aforesaid jump in earnings during
theperiodwasaresultoflowerbaseeffectasinflatedrepair&maintenanceexpense
onthebackofscheduledturnaroundsuppressedthegrossmarginsof1QCY14.While,
lossfromassociate(AKBL)furthercompressedtheearningsoftheprecedingquarter.
Thus,asubstantialincreaseintheprofitabilityofthecompanywasseenin2Q.How
ever, on a cumulative basis, net earnings of the company clocked in at PKR802mn
(EPS:PKR0.86),downbyasubstantial56%YoY.Alongwiththeresult,thecompany
alsodeclaredacashdividendofPKR1.0/share.
According to our industry sources, domestic DAP prices have recently increased by
PKR60/bagfollowedbyahikeofPKR70/bagearlierinAug14.SupremeCourtrecently
declared imposition of GIDC unconstitutional and directed the govt. to refund the
amountwhichhasbeencollectedsofar.DespitetheaforesaidstatementgivenbySC,
wehavenotincorporatedthesameinourfinancialmodelsasweareawaitingfurther
clarity on the issue. However, we have performed a sensitivity analysis if GIDC is re
movedfromJul14onwards.
Our calculations suggest that FFBL will have a onetime after tax cash inflow of
PKR5.4/shareifthegovt.refundsthecollectedamountofGIDC.Owingtoanticipated
cash reversal and expected removal of GIDC, the stock price has performed well dur
ing past couple of days, resulting in a downside of 14% to our TP of PKR 37.1/share,
therefore,wedowngradeourstancefromHoldtoSell.OurstancecanchangetoBuy,
only if GIDC is completely removed and fertilizer manufactures dont pass on this
benefittofarmers,anunlikelyeventinourview.
LowervolumesandinflatedCOGSdraggeddowntheprofitabilityin1HCY14
Challenges pertaining to operational conditions continued to persist in the fertilizer sector in
1HCY14.Prevailinggasavailabilityissuesinthecountryadverselyaffectedthefertilizerproduction
capacityofFFBL,whilethegastariffhikeduringtheperiodhitthemarginsofthecompany.During
1HCY14,gascurtailmentroseto41%ascomparedto33%isSPLYwhichresultedinlowerproduc
tion and offtake of Urea and DAP. Production volumes of Urea & DAP went down by 12%/14%
YoY,whileofftakelevelsofUrea&DAPdroppedby13%/17%YoYto102ktonsand214ktons,re
spectively. Consequently, net revenues of the company registered a decline of 22% YoY to
PKR15.8bn. Furthermore, gas price hike hit FFBL the most as it remained unable to pass on the
increaseinproductioncostonDAP,translatingintolowergrossmarginsof20.4%ascomparedto
26.1%inCPLY.Resultantly,grossprofitofFFBLpulleddownbyasubstantial39%YoY.
Compressedfinancialcharges&lowertaxratefailedtopumpuptheprofitability
Tricklingdownfurther,despite3.8%YoYincreaseincash&STinvestments,otherincomedropped
byamere3%YoYtoPKR230mnduetodeclineininterestrates.While,36%YoYsubstantialreduc
tion in financial charges, and lower effective tax rate of 21% in 1HCY14 as compared to 35% in
SPLYsupportedthenetearningstosomeextent,butfailedtotranslatethisintoearningsgrowth
forthecompany.
Profitabilitytopropupgoingforwardduetodiversification
Although,thecompanyisdiversifyingitsrevenuestreambyinvestinginpowerprojectsaswellas
bankingonassociatestofurtherpumpuptheprofitabilityofthecompany,consistentgassupplyis
likely to remain a key challenge for the fertilizer business, going forward. On the other hand, our
industrysourceshaverevealedthatdomesticDAPpriceshaverecentlyincreasedbyaPKR60/bag
followedbyahikeofPKR70.0/bagearlierinAug14.Inspiteoftheaforesaidpriceincrease,wefur
DISCLAIMER:Theaboveinformationandadviceisgiveningoodfaith,withoutanylegalresponsibility.TaurusSecuritiesLimitedorindividualscon
nectedwithitmayhaveusedresearchmaterialbeforepublicationandmayhavepositionsinormaybeinterestedinthesecuritiesmentionedherein.
HassaanBinGhafoor
hassaan.ghafoor@taurus.com.pk
Direct:+922135216403
FFBLPA SELL
Stockpri ce 43.2
Targetprice 37.1
Currentupsi de/(downsi de) 14.3%
Outstandi ngshares(m) 934.1
MarketCap(PKRbn) 40.4
Freefl oat 31.8%
3MAvg.dai l yval uetraded(PKRm) 26.1
3MAvg.dai l yvol ume(m) 0.7
3MHi gh 43.2
3MLow 37.8
KeyFinancials PKRbn
Yearend CY13A CY14F CY15F CY15F
Netsal es 54.46 50.54 54.82 58.35
Costofsal es 39.94 40.28 43.80 47.05
GrossProfi t 14.51 10.26 11.01 11.31
Operati ngprofi t 10.01 5.99 6.33 6.21
Fi nanci ngcosts 1.51 0.92 0.84 0.84
NetProfi t 5.61 3.96 4.24 4.29
KeyMetrics
EPS 6.01 4.24 4.53 4.59
DPS 5.00 3.00 4.00 4.00
BVPS 14.8 15.3 15.3 15.6
P/Ex 7.2 10.2 9.5 9.4
P/BVx 2.9 2.8 2.8 2.8
Di vi dendYi el d 11.6% 6.9% 9.3% 9.3%
Earni ngsgrowth 29% 29% 7% 1%
ROA 15% 13% 14% 14%
ROE 41% 28% 30% 29%
Netdebt/Equi ty 22% 29% 28% 26%
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FFBL Rel.KSE100
Priceperformance
INSIGHT TSLResearch


ther expect a raise of ~PKR4050/bag during Sep14 which will offset the soaring raw material
costs.
WeassignalowprobabilitytocompleteGIDCremoval
Supreme Court recently declared imposition of GIDC unconstitutional and directed the govt. to
refund the amount which has been collected so far. But, we opine that, GIDC has become a key
sourceoffederalrevenue(0.6%ofGDP),absenceofwhichwillmakeachievingFY15sfiscaldeficit
of5%nearlyimpossible.Resultantly,weexpectthegovt.tochallengethedecisionorintroducea
similartaxhead.DespitetheaforesaidstatementgivenbySC,wehavenotincorporatedthesame
inourfinancialmodelsasweareawaitingfurtherclarityontheissue.However,wehaveperformed
a sensitivityanalysis of earnings if theGIDC is removed from Jul14 onwards. CY14/CY15 earnings
canriseby36%/67%incaseGIDCiscompletedremoved.
Moreover, in this scenario possibility of cash reversal all come into play and our calculation sug
gests that FFBL will have a onetime after tax cash inflow of PKR5.4/share if the govt. refunds the
entire amount collected during Jan12 to June14, which may also result in a bumper dividend.
However, even if this does occur (we assign a low probability to this event), Fertilizer companies
willinturnhavetoreducetheureaprices(byasmuchasPKR450/bag),thusnullifyingthepositive
earningsimpacttoamajorextent.

Aboutthecompany
Fauji Fertilizer Bin Qasim Limited Plantsite is a modern Granular Urea and DiAmmonium Phos
phate (DAP) fertilizers manufacturing complex, built at a cost of US$ 468 Million and located in
Eastern Zone of Bin Qasim, Karachi, with Head Office at Harley Street, Rawalpindi. FFBL is the
onlyfertilizercomplexinPakistanproducingDAPfertilizerandGranularUreathusmakingsignifi
cant contribution towards agricultural growth of the country by meeting 45% of the demand of
DAPand13%ofUreaindomesticmarket.ThecompanyhasinCY13acquired21.6%stakeinAskari
Bank.
TaurusresearchisavailableonBloombergunderTAUR&CapitalIQ

CY14 CY15
Ol d 4.24 4.53
New 5.77 7.58
%change 36% 67%
EPSsenstivity
PKRmn 1HCY13 1HCY14 YoY 1QCY14 2QCY14 QoQ
Netsal es 20,143 15,749 22% 6,041 9,708 61%
COGS 14,881 12,532 16% 5,211 7,321 41%
GrossProfi t 5,262 3,217 39% 830 2,387 188%
Operati ngProfi t 3,402 1,269 63% 118 1,151 878%
Fi nanci al charges 624 397 36% 42 355 743%
PBT 2,800 1,018 64% 74 944 1178%
Tax 983 216 78% 26 190 634%
PAT 1,817 802 56% 48 754 1473%
EPS 1.95 0.86 56% 0.05 0.81 1473%
DPS 1.75 1.00 43% 1.00 n.a
Grossmargins 26.1% 20.4% 13.7% 24.6%
Netmargins 9.0% 5.1% 0.8% 7.8%
Source:Companydata,TSLResearch