FFBL Report

8/17/2019 FFBL Report

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Disclaimer: The information and opinion provided in this report is compiled and prepared by our research department from

sources they believe are in good health and reliable. However, there is no representation or warranty, implied or expressed, with

regard to its accuracy, correctness or completeness. All estimates and opinions in this report are based on the department’s

judgment and are subject to change without any prior notice. These estimates and opinions are provided in good faith without

any legal responsibility.

Fauji Fertilizer Bin Qasim Ltd. – Valuation Report

Industry Overview

The fertilizer industry is an integral part of Pakistan’s economy. The Pakistani fertilizer industry

produces, imports and distributes various types of fertilizers. The principal raw material for the

manufacture of anhydrous ammonia, and therefore, fertilizers, is natural gas. In fact, fertilizer

industry is the second largest consumer of Pakistan’s total gas availability (26% for fertilizer

consumption vs. 33% in the case of energy). Natural gas used as feedstock, which is an essential

input in the production of ammonia, average roughly over 30% of fertilizer production costs and

around 75% of total gas requirement. Used additionally for fuel purposes (fuel stock), natural gas

generally accounts for over 55% of production costs. The following companies constitute the

fertilizer sector of Pakistan; Engro Fertilizer, Fatima Fertilizer, Fauji Fertilizer Bin Qasim Ltd.

and Fauji Fertilizer Company, having market share of 30%, 6%, 24% and 40% respectively.

Market Share

FFC

Engro Fertilizer

Fatima Fertilizer

FFBL

Recommendation

BUY, Hold


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FFBL - Company Introduction

FFBL is a modern Granular Urea and Di-Ammonium Phosphate (DAP) fertilizers manufacturing complex,

built at a cost of US$ 468 million and located in eastern zone of Bin Qasim, Karachi. FFBL is the only

fertilizer complex in Pakistan producing DAP fertilizer and Granular Urea thus making significant

contribution towards agricultural growth of the country by meeting 45% of the demand of DAP and 13%

of Urea in domestic market. The major products of FFBL are Urea and DAP having an installed capacity

of 551,000 MT and 650,000 MT respectively. The major shareholders of FFBL are FFC (49.8%) and Fauji

Foundation (18.29%).

Factors Affecting the Company

•Gas Curtailment

In 2014, the gas curtailment for FFBL increased by 3% to 41% resulting in a reduction in annual

production of Urea and Ammonia by 5% each as compared to last year. However, this reduced to 31% in

2015, that helped increase the production of both Urea and DAP. We are confident that the gas supply

for FFBL will improve in the near future; therefore, we have assumed average gas curtailment of 28% in

the upcoming years on the account of upcoming LNG project.

• Improved DAP margins

With recently announced subsidy under the Kissan package at PKR500/bag of DAP, and stable

phosphoric acid prices at US$805/ton, FFBL has found some breathing space with improved DAP

margins.

• Competition from International Markets

The international prices of Urea and DAP have declined by 5.5% and 11.6% respectively during the last

few days of the previous year. Whereas, in Pakistan, according to Pakistan Bureau of Statistics (FBS), the

prices of Urea and DAP have increased by 65% and 35% respectively. This will negatively affect the sales

of domestic fertilizer producers.

• Government of Pakistan Support


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The fertilizer sector has always enjoyed support from the Government of Pakistan in the form of

subsidized feed gas supply. Recently, however, pressure has arisen from the imposition of Gas

Infrastructure Development Cess (GIDC), prioritizing other sectors for gas allocation, and also due to the

recent increase in gas tariffs for feed and fuel stock. However, to meet such challenges FFBL has set up a

coal based power generation company by the name of FFBL Power Company Limited that will not only

cater for power and steam requirement of FFBL but will also supply electricity to K-Electric thereby

improving financial health of the company.

• Diversification

FFBL has already made investments in Askari Bank Limited and Fauji Cement. The company continues on

its path of diversification and has taken a big leap forward with the incorporation of coal based power

generation company. This company will not only meet the requirement of FFBL but will also be able to

sell surplus electricity to K-Electric. The project will go a long way in fulfilling company’s goal of

maintaining sustained growth and broadening its income base. FFBL is also making progress in its Meat

and Food projects. The company has shown interest in acquiring Noon Pakistan Limited, a dairy based

company.

FFBL’s investment in Foundation Wind Energy power projects will bear fruit in 2015. Foundation Wind

Energy – II has started its commercial production in Dec 2014, while Foundation Wind Energy – I is

expected to start its commercial production in March 2015.

Assumptions

• On the account of upcoming LNG project and the improvement in gas curtailment the company

experienced in 2015, we assumed gas problems for the company will improve and will remain at

28% in the coming years.

• Due to higher DAP margins as compared to UREA margins, we assumed capacity utilization to be as

follows (and remain at this level); 75% for Urea and 110% for DAP.• Debt schedule is prepared in accordance with the company’s plans of paying off their debt.

• Investment in assets is assumed in line with average investment made during the last three years.

• Inflation is calculated as an average of the last 5 years.


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• Dividend payout ratio is assumed to be 90%, calculated as an average of the payout ratios of the last

5 years.

• Terminal growth rate is assumed to be 4.5%, in line with long-term GDP growth rate.

• The required equity rate of return is calculated using the CAPM - Capital Asset Pricing Model.

Valuation Techniques

We have used two valuation techniques to derive the fair value of share price; Free Cashflow to Equity

Model and Dividend Discount Model.

Free Cashflow to Equity -- For this model;

•

We have assumed a long-term growth rate of 4.2% (in line with long-term GDP growth rate).• The discount rate used (10.6%) is calculated using the CAPM model; using a risk-free rate of 6%,

adjusted beta of 0.66 and market risk premium of 7%.

• The terminal value is calculated as at the end of the year 2019, which is then discounted back to

present using the discount factor.

• This PV of terminal value along with the total value of equity (derived by discounting the 5-year

forecasted free cash flow to equity using the discount factor of 10.6%) is then divided by the

number of shares to derive a value of Rs. 67/share.

TERMINAL VALUE EQUITY VALUATION

Long Term Growth Rate 4.2% Total Value of Equity 62,146,055

FCFE at (T+1) 3,853,932 No. of Outstanding Shares 934,110,000

Terminal Value 60,030,091 Equity Value/Share 67

PV of Terminal Value 40,089,846

Dividend Discount Model – For this model;

• We have assumed a long-term dividend growth rate of 4.86% (calculated using the retention ratio

and the return on equity – taken as an average of last 5 years).


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• Dividend payout ratio is assumed to be, and remain at, 90%, calculated as an average of the last 5

years.

• Using the expected EPS & expected DPS for the year 2015, the growth rate and dividend payout

ratio, we have derived the value to be Rs. 60.95/share.

DIVIDEND DISCOUNT MODEL

Growth Rate 4.86%

Dividend Payout Ratio 90%

3-Quarter EPS 1.04

Forecasted EPS for Last Quarter 2.68

EPS 3.72DPS 3.348

DDM = DO*(1+g)/ke-g 60.95

VALUE OF FFBL 60.95

Financial Highlights

FINANCIAL PERFORMANCE 2014 2013 2012 2011 2010

Profitability RatiosGross profit ratio (%) % 22.43 26.65 23.92 36.00 31.12

EBITDA Margin to Sales (%) % 17.14 21.01 20.18 33.28 27.59

Operating Leverage Ratio % 0.25 0.28 3.65 2.14 2.59

Net Profit To Sales % 8.12 10.65 9.06 19.27 15.06

Return on Equity % 30.73 45.15 34.57 78.96 53.35

Return On Capital Employed % 17.41 43.18 31.48 63.80 40.46

Liquidity Ratios

Current Ratio Times 1.10 0.73 1.00 1.17 1.19

Quick/Acid test Ratio Times 0.90 0.56 0.70 0.90 0.98

Cash and Cash Equivalent to

current liabilities

Times 0.72 0.40 0.44 0.34 0.91

Cashflow from operations to

sales

% 17.20 18.25 3.01 14.95 17.08

Activity / Turnover Ratios

Inventory Turnover Times 28.55 13.30 8.80 15.29 23.86

Inventory Turnover Days 13 27 42 24 15

Debtor`s Turnover Times 32.21 26.74 11.67 31.03 56.87


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Debtor`s turnover Days 11 14 31 12 6

Creditor`s Turnover Times 6.00 6.83 5.12 6.53 8.58

Creditor`s Turnover Days 61 53 72 56 43

Total Assets Turnover Times 1.07 1.50 1.18 1.39 1.22

Fixed Asst Turnover Times 4.05 4.17 3.46 3.86 2.94Operating Cycle Days (37) (12) 1 (20) (22)

Investment / Market Ratios

Earnings per share (Pre-Tax) Rs 6.19 9.14 6.93 17.31 10.37

Earnings Per Share(After-tax) Rs 4.30 6.21 4.65 11.53 6.97

Price earning Ratio Times 10.51 7.06 8.31 3.68 5.13

Dividend yield Ratio % 8.85 11.41 11.66 23.57 18.33

Dividend payout ratio % 93.03 83.19 96.77 86.73 93.97

Dividend cover ratio % 107.49 124.14 103.26 115.30 106.41

Dividend per Share-intern Rs 1.75 2.75 2.25 6.50 3.05

Dividend per Share-ProposedFinal

Rs 2.25 2.25 2.25 3.50 3.50

Market price per share

Year end Rs 45.21 43.81 38.59 42.43 35.73

High During The year Rs 46.33 46.65 50.88 63.67 38.65

Low during the year Rs 37.20 36.70 35.30 35.08 25.08

Break up value Rs 13.99 13.75 13.44 14.60 13.07

Conclusion

On the basis of our valuations, FFBL currently appears undervalued. Its fair value appears to be

approximately Rs. 64/share – taken as an average of the values derived from the two valuation models

used, 67 derived from FCFE model and 60.95 derived from dividend discount model. The Buy or Hold

strategy is recommended for this scrip for medium to long term investment.


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FFBL Report