In light of the recent investor interest in fertiliser stocks – reasonably expected given the importance of the sector in relation to our agronomy – Fatima Fertiliser Limited (FATIMA) has emerged as a star for stock investors posting a YTD capital gain of 58 per cent. This comes on the back of a fundamentally strong business profile, several competitive advantages, and much embedded potential which investors have been keen to latch on to. The company’s plant, located on the Mari Gas network, has a name plate capacity of 1.58mln MT of fertiliser, which includes Urea, CAN, NP and NPK. Although encountering some delays, the plant initiated trial production during March 2010, finally culminating into the announcement of Commercial Operations Date (COD) on July 01, 2011.
CAN – a tacit advantage in present times
Currently, FATIMA is the second largest manufacturer of Calcium Ammonium Nitrate (CAN) in Pakistan following Pak Arab Fertiliser Limited. The presence of CAN in the production portfolio is a distinct advantage for the company as the product is considered to be a cheaper alternate to urea, yet it offers virtually the same key nutrients as those contained in latter more popular agri-input. From a technical standpoint, CAN is a hygroscopic product which requires lesser moisture levels to be absorbed to the required degree by the plants. FATIMA has a production capacity of 419KT of CAN which approximates to 26 per cent of total installed capacity. Although the market for this product still lags behind that of urea, owing primarily to farmer familiarity with the latter, the response to CAN from the farmer community can be deemed encouraging. Moreover, prices have also followed the same trend of late as of its superior counterpart. With heightening prices of urea, it is likely that CAN would enjoy some spill-over demand for which FATIMA would be in a position to reap the benefits from in terms of greater volumes and also better margins.
Performance predictor
FATIMA’s plant had been on trial run for a good part of 12 months incurring substantial time delays and cost overruns, but this is to some degree a good thing for the company. After ironing out the chinks in initial operations, various production lines are steadily achieving stabilisation between the 70-80 per cent level. More importantly the company has been selling its trial produce in the market, capitalising its sales and related expenditure. This has resulted in a trial run gain of Rs4.7b as of the last published figures of Mar11. With higher final product prices, this gain is expected to run higher and with the COD now achieved, the company is in a position to amortise the gain on its books over the coming quarters. The rate of amortisation could vary, but what is likely is that the past gain would result in an incremental earning impact of Rs2/share over the entire amortisation period. The trial run is also a significant indicator of a robust revenue and profit stream; the company had been able to generate revenues of Rs1.4b till Mar11. All this contributes to a strong business profile – amidst a supply deficit and growing demand in the fertiliser sector.
Leaving everything aside, supply side risk is the hottest talk circling the fertiliser industry. Interestingly, this is another area where FATIMA seems to be better off than several others. The company faces gas curtailment levels of 6-7 per cent on its 100mmcfd committed feed line by virtue of it being situated on the Mari gas network compared to 20 per cent curtailment bourn by those which receive feedstock from Sui Northern. These are the ones which initiate price hikes to compensate for their lower volumes due to which FATIMA emerges as a windfall gainer. Bilal Qamar, analyst at JS Global Capital, estimates that “a Rs100 per bag hike in urea price (only to account for an increase in feed stock gas prices) is likely to have a positive impact of Rs0.14/ share on Fatima’s earnings”. Additionally, FATIMA’s birth came under the Fertiliser Policy of 2004, under which the plant enjoys a fixed and subsidised rate of USD 0.7/mmbtu of gas feed for a period of 10 years in comparison to the current $1.2 paid by peer manufacturers. Naturally, any price hike in the industry would certainly come as a bonus for the company and result in margin augmentation. Based on this, FATIMA seems to be better positioned than others as far as business prospects are concerned.
The analyst forecast
The stock price has seen a handsome trend in recent months. Nevertheless, the arguments presented above point towards a still possible upward potential. There are possible downside risks present as well including (I) risks of increased gas curtailment on Mari network, (II) Shortening of international-domestic prices differential, and (III) Burden of financial costs given an initial 65:35 debt-equity structure. Nevertheless, we take a buy stance where the upside fares better than downside risks and accordingly anticipate a target price of Rs19.4/share (upside of 14 per cent). However, after incorporating the recent surge in price, we do not recommend overweight exposure for the stock.
