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xResearch

Active Member
Apr 9, 2017
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#11
Aba Ali Habib Research
26 September 2017


Pakistan Fertilizer Sector: Flash Note.

Fertilizer Companies on the edge of turn around.
  • Pakistan fertilizer sector has remained among worst performers for the past few years, where FFBL remained top laggard with loss of 33.0% in its value during past one year followed by FFC, EFERT and FATIMA with loss of 27.8%/10.7%/9.4%, while benchmark KSE100 index enhanced by 7.5% during the same period.
  • Major reasons for bearish performance of the fertilizer sector included i) Supply glut on the back of higher local production, which led to higher discounts offered by the companies, hence hurting their profitability and ii) decline in international urea prices, as production cost of the Chinese manufacturers was decreasing.
  • However, scenario has been changing since Aug’17, where Urea prices has witnessed sharp increase of ~19% in past two months as a result of surge in international coal prices by 13.4% to USD ~93.0/ton coupled with expected increase in demand on back of upcoming crop season (Rabi).
  • We believe, recent hike in international urea prices has opened the pave for domestic players to export excess urea stock in international market.
Coal prices: a premier game changer.

The rebound in international urea prices is primarily due to increasing coal prices. During 1QFY18 coal prices has witnessed a growth of ~15% QoQ from 4QFY17 average of USD 76.0/ton to USD 86.7/ton due to increase in china’s appetency for imported coal. China being world’s top coal importer bought 25.27mn tons of coal in August, up by 30% MoM from July’s 19.46mn tons. This surge in coal prices has increases the cost of the production of fertilizer manufacturers in china as ~70%-75% of Chinese fertilizer production plants uses coal as their feed instead of gas which is widely used in Europe as well as in Pakistan. Resultantly, increase in the cost of production has led to the temporary shutdown of some plants, which has reduced its exports in global market. China produces one third of the global urea, which gives it a dominant position in setting up the prices of urea. Consequently, on back of lower supply from china amid rising coal prices has boosted the international urea prices upward by ~16% in last two months from average USE ~227/ton to ~290/ton in last week of Sept’17.

Local players; to outshine

To recall ECC has extended the Urea export date till Oct’2017 with increased industry quota from 300k ton to 600k ton. FFC has been allocated the major share of ~40.6% (244kton), followed by EFERT ~31.6% (190K ton), FFBL ~10% (60Kton), Dawood, Agritech and other players represent ~6%/4%/8%. By the end of 1H17 industry exported 123K ton of urea (FERT exported 87K ton and FFC exported 15k ton). As per the data released by NFDC in Mid-August, Overall urea export of the industry clocked in at 179K tons at the end of July’17, similarly FFC is likely to export 35K tons by the end of this month (Sept,17) at a price settled before this rally. As a result, on basis of remaining quota we believe FFC will be major beneficial as it has highest urea export quota in hand, followed by EFERT and FFBL.

Local urea prices up by PKR 50 per bag.

As per our distributor sources, local urea prices in Pakistan went up by PKR 50 per bag to PKR 1,270 per bag from 1,220 per bag following the steps of international urea price. We run sensitivity analysis on our Fertilizer universe (EFERT and FFC), and based on that by increase in PKR 50 per bag in urea prices, an additional contribution of PKR 1.18/0.98 per share would be observed in the bottom-line of the FFC/EFERT.
 

xResearch

Active Member
Apr 9, 2017
1,537
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38
#12
Aba Ali Habib Research
27 September 2017


Pakistan Fertilizer Sector’s offtake Update Aug’17
Fertilizer offtake jumps 180%/65% MoM/YoY, amounts to 948k tons.

  • During August ’17, industry urea offtake surged by 180%/65% MoM/YoY to 948K tons primarily due to 1) anticipation of increase in prices and 2) rise in demand led by upcoming Rabi season. Similarly, DAP offtake witnessed a growth of 16% YoY to 83K tons while declining by 71% MoM.
  • Among companies in the urea segment, EFERT leads with a massive growth of 357%/125% MoM/YoY followed by FFC (175%/64% MoM/YoY), FATIMA (155% MoM, declined by 30% YoY) and FFBL (83%/41% MoM/YoY).
  • However, during August’17 company’s offtake in the DAP segment depicted inadequate performance witnessing fall/rise on MoM/YoY, where FFC and EFERT decreased by 83%/83% MoM while surged by 196%/19% YoY, respectively.
  • Urea export in Aug’17 clocked in at 67K ton falling by 29.4% MoM against previous month export of 95k tons, where FFC exported 37.5k tons followed by Fatima (28.2k ton) and other local players (1.5k tons).
  • During Aug’17 FFC emerged as a top leader in urea with a market share of 40% followed by EFERT (36%) and FFBL (8%). However, in the DAP segment EFERT appeared as top leader with market share of 27%, followed by FFBL (25%) and FFC (14%).
  • Urea and DAP prices during period under review remained stable at PKR 1321/2605 per bag against PKR 1324/2606 per bag in the previous month.
 

xResearch

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Apr 9, 2017
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#13
AHL Research
05 October 2017


Fertilizer Offtake
Urea sales down 40% YoY in Sep’17, up 29% YoY in 9MCY17


Sep’17: Slowdown in Urea Offtake amid High Base
As per provisional fertilizer offtake figures for Sep’17, urea sales recorded a 40% YoY and 81% MoM decline to 178k tons. The dwindling sales are on account of high base of Aug’17 offtake when it was expected that local manufacturers will lift up prices by PKR 40-50/bag from 1st September onwards. FFC and FFBL’s cumulative urea offtake plunged by 41% YoY to 76k tons. Likewise, EFERT’s urea off-take dropped by 12% YoY to stand at 64k tons. Albeit, major surge was witnessed in NFML’s sales, which jumped up drastically by 30x YoY to 30k tons given massive discounts offered. However, urea offtake witnessed significant 29% YoY growth during 9MCY17.

Urea exports clocked-in at 92k tons in Sep’17
On the export front, total exports during Sep’17 were recorded at 92k tons, down 25% MoM taking 3QCY17 and 9MCY17 exports figures to 304k tons and 429k tons, respectively. FFC remained the top performer (amid availability of export quota) with 160% MoM surge to 76k tons. Cumulatively during 3QCY17, FFC led with urea exports of 123k tons followed by EFERT (102k tons) and FATIMA (74k tons). Moreover, we estimate remaining export quota near 171k tons with deadline of Oct’17.

DAP sales up 3.4x YoY in Sep’17 and 56% YoY in 9MCY17
DAP sales showed significant surge of 3.4x YoY and 4.4x MoM to 363k tons in Sep’17. Furthermore, during 9MCY17, DAP sales exhibited a solid growth of 56% YoY to stand at 1,319k tons. FFBL sales clocked-in at 85k tons during Sep’17, translating into a jump of 75% YoY, and 308% MoM. EFERT’s DAP sales registered a 103% YoY upswing to 55k tons during the month. Additionally, FFC’s DAP sales amounted to 165k tons during Sep’17.

3QCY17 earnings estimates
Based on provisional offtake figures, we expect FFC to post a 4% YoY earnings growth to PKR 2.14/share in 3QCY17. Moreover, EFERT’s profitability is expected to remain stagnant during 3Q with EPS estimated at PKR 2.12. While FFBL is projected to post an EPS of PKR 0.30/share during the quarter in contrast to a loss of 0.17 in prior year.

Inventory position & Outlook
Closing inventory for urea with the local producers, as of 1-Oct-17, stood at 796k tons, while total urea closing inventory (both local and imported) was recorded at 813k tons. The closing inventory of DAP as of 1-Oct-17 stood at 362k tons (FFBL, FFC and EFERT hold approximately 191k, 96k and 21k tons, respectively). We view that with diminishing urea inventory levels amid expected completion of exports in Oct`17 and expected demand in the upcoming Rabi season, pricing power of local manufacturers will restore going forward. Our top picks remains FFC and EFERT with target price of PKR 110/share and 75/share respectively.
 

xResearch

Active Member
Apr 9, 2017
1,537
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#14
Fertilizers – Inventory levels rise as urea sales fall 71% MoM

Urea off-take for the fertilize industry remained relatively stable at 4,502kT during 10MCY19, down by 2% YoY. Urea off-take for the listed space, however, fell by 16% YoY largely due to higher operating rates of smaller fertilizer manufacturers, which were primarily fueled by subsidized RLNG. Consequently, the market share of smaller players grew from negligible levels to 15% during 10MCY19.

On monthly basis, urea off-take fell by a substantial 71% MoM (-74% YoY) to 119kT. This decline is largely due to a high base effect in addition to an air of uncertainty over domestic urea prices because of the ongoing GIDC saga. Consequently, dealers likely deferred their purchases during the month for further clarity over this scenario.

On a company-wise basis, FFC’s off-take fell by 12% YoY to 1,812KT during 10MCY19 with a market share of 40%. EFERT’s urea sales fell by 15% YoY to 1,393KT (31% mkt. share) while FFBL’s and FATIMA’s sales fell by 26% YoY and 23% YoY to 335kT and 306kT, respectively.

Low urea sales coupled with high urea production (535kT) during the month has caused the inventory level to grow by over 100% MoM to 886KT as of Oct’19.

Going forward, we believe these high inventory levels will get toned down in the coming months due to the seasonal increase in demand.

Report by:
BMA Capital Management Ltd
 

xResearch

Active Member
Apr 9, 2017
1,537
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#15
AKD Daily
Pakistan Fertilizer: Supply surplus poses risk to pricing power
· As per data released by NFDC, Urea offtake declined 71/74% YoY/MoM to 119K tons in Oct’19. This takes 10MCY19 urea offtake to 4.49mn tons, down 2% YoY. The ending inventory stands at 886K tons in Oct’19 vs. 212K tons in Oct’18/peak of 1.7mn tons in May’17.
· Subsidized LNG supply to non-operational fertilizer plants since Oct’18 and 100K tons of urea import remained the main culprits for the inventory build-up. If LNG plants remain operational for even 1HCY20, further build-up in urea inventory levels from this point could result in discounts from the fertilizer players.
· On the other hand, directing the potential subsidy towards small farmers (owning 50% of farmland) could reduce urea price by PkR860/bag. This would improve farmers’ economy, without creating excess urea supply situation in the Fertilizer sector.
· While profitability is expected to improve sequentially due to pass on of cost inflation, we believe sector price performance will remain a function of (i) demand supply situation and (ii) Supreme Court’s ruling on the GIDC scenario. We thus advise investors to maintain cautious stance in the sector.

AKD Research