We reiterate our Buy stance on FFBL with a SoTP based TP of PKR37/sh (fertilizer ops: PKR20/sh). Fertilizer profits are expected to do well amidst strong core margins and lower finance cost due to reduced borrowings.
Strong core performance should offset impairment on subsidiaries, if any. A possible reduction in FFL losses owing to increased prices and lower finance costs should help FFBL on a consolidated level. However, FML is expected to expand losses.
Despite resilient earnings, even after one-off high super tax and other expenses in 1HCY22, FFBL has lagged both the Fertilizer sector and the KSE100 by 15% / 11% CY22td. FFBL trades at a cheap CY22f/23f P/E of 2.7x/3.7, with a long-term dividend yield of about 10%.
Maintain Buy on FFBL with a TP of PKR37
We reiterate our Buy stance on Fauji Fertilizer Bin Qasim (FFBL) with a SoTP based December 2023 TP of PKR37/sh. Core profits are likely to do well, majorly led by elevated primary margins relative to historical mean, and lower finance cost on the back of reduced borrowings. We project FFBL’s unconsolidated EPS in CY22/23/24f at PKR7.7/5.6/6.6, with fertilizer operations alone valued at PKR20/sh. Higher dividends from PMP, and consistent dividends from AKBL (from CY23f) and FFBL Power should help enhance FFBL’s bottom line. On a consolidated level, while FML’s losses will likely expand, FFL’s burn rate may decelerate.
Strong earnings even if margins normalize
FFBL’s core profitability is set to improve on elevated primary margins, currently about USD250/ton. Following the PKR slippage and inflationary pressures, FFBL and FFC have both increased DAP prices to c.PKR14,800/bag. This price level is likely to sustain if international DAP and Phos acid prices remain broadly stable from here, which may be the case owing to i) geopolitical tensions (Russia-Ukraine, China-Taiwan), ii) sticky natural gas prices, and iii) elevated crop prices such as maize, wheat and rice (among others). As a result, DAP primary margins and DAP prices may only gradually normalize – however, we stay conservative and reduce primary margins to USD200/ton in CY23f and USD150/ton from CY24f.
Potential for dividends to resume
Disappointing performance by some of FFBL’s subsidiaries has resulted in impairments and cash calls for the parent. As a result, FFBL has failed to announce a cash dividend since CY18. However, if core profits continue their elevated trend as we project, it is possible that FFBL looks to resume cash payouts from this year. This can be a major trigger for the stock, in our view, even if the initial dividend amount is relatively small. FFBL carries a dividend yield of 7.5% in CY23f and a sustainable c.10% going forward.
Attractive valuations reinforce our stance
Despite the strong core profitability since the last six quarters (excluding super tax and one-off expenses), FFBL has lagged behind both the sector and market by 15%/11% CYTD. The stock now trades at an undemanding CY23f P/E of 3.7x - at current levels, we believe FFBL’s portfolio is only being assigned negligible valuations by the market. In this regard, while FFL and FML are still in losses, whereas FFBL Powers contribution seems to be underplayed. We think the risk-reward is attractive here, and FFBL can rebound quickly in the ongoing bounce at the KSE100.
The sector is enjoying high pricing power
In light of the recent budgetary measures (abolishment of GST on fertilizer products), the fertilizer sector increased Urea prices by PKR350/bag to PKR2,155/bag, and DAP prices by c.PKR1,500/bag to c.PKR14,800/bag. The prices of fertilizer products are expected to rise further amid expected an increase in gas tariffs (cabinet approval awaited), coupled with an increase in landed international DAP pushed even higher by the recent PKR devaluation. Despite the record high DAP prices in 1H, volumes declined by a modest c.10% YoY, and FFBL offtake increased by 35%. Better commodity prices and farm economics appear to be in play. Going forward, while the overall industry may witness a further decline in DAP sales, the topline and margins are likely to increase due to better pricing.