fauji fertilizer company limited

Multiline Securities (Pvt.) Ltd

Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

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FAUJI FERTILIZER COMPANY LIMITED

Recommendation [email protected] share is trading at around 6.73% discounts to our DCF based fair value of Rs. 125.82 per share and PE multiple of 12.50. We recommend a buy.

Contents

Shares outstanding (mn) 493.474 Industry Analysis Market Capitalization 57.933 bn

• Introduction--Fertilizer Industry(2) Market Value Added 44.97 bn • Introduction

Free Float Shares (mn) 246.5 • Product line of Fertilizer Sector • Chart describing the Production by

Manufacturers Free Float Rs (bn) 28.93

BV/ Share 26.25 • Demand Analysis(3) • Overall demand of Fertilizer PE (x) 12.50 • Product wise demand

• Future Outlook(4) P/BV 4.47

Company Analysis

• Fauji Fertilizer Company Limited—Introduction(5) • Shareholding Pattern. • Existing Production Facilities. • FFC Capacity expansion Plans.

• Past Performance(6) • Market Position(7)

• Market Participation of FFC in Urea Market. • Dividend Policy(8) • Valuation(8) • Income Statements(9) • Balance Sheet(10) • Cash Flow Statement(11) • Key Ratios(12)

* prices of 15-May-07 are used



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INDUSTRY ANALYSISINDUSTRY ANALYSIS INTRODUCTION—FERTILIZER INDUSTRY: Pakistan’s economy is agro-based; however our cultivable land is deficient in nutrient contents. This deficiency can only be overcome through the balanced use of fertilizer. Presently, there are ten manufacturing units in Pakistan. Out of these, four units are located in the public sector and six are operating in the private sector. The province-wise distribution of units confirms that 5 units are located in Punjab, 3 in Sindh and 2 in the NWFP.

PRODUCT LINE OF FERTILIZER IN PAKISTAN: Nitrogen 46% (Urea)

. Fertilizer production is concentrated in nitrogenous fertilizers, which comprises 85% of all fertilizers produced in the country. Although other types of fertilizers are also produced in Pakistan, the bulk of whose demand is imported. The main reason for this concentration on nitrogenous fertilizers is that its main raw material i.e. natural gas is cheaply available in the country. The raw material for other fertilizers such as potassium and phosphate has to be imported.

Calcium Ammonium Nitrate (26% Nitrogen) (CAN) Nitrophas (23% Nitrogen and 23% Phosphorus) (NP) Single Super Phosphate, (18% Phosphorus) (SSP) Di-Ammonium Phosphate (18% Nitrogen and 46% Phosphorus) (DAP) Sulphate of Potash (SOP) - (Potash fertilizer) NPK in different ratios - (Mixed fertilizer)

The local fertilizer companies meet almost 80% of Pakistan’s Fertilizer requirement. The total installed capacity is over 5,124 million tones /annum. It mainly comprises of 4,180 million tonnes for urea and remaining for NP, DAP, CAN and SSP.

Fertilizer Demand

80%

20%

Local Manufacturer Import

0200400600800

1000120014001600

2002 2003 2004 2005 2006

TotalFertilizerSalesRevenue



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DEMAND ANALYSIS:DEMAND ANALYSIS: The economic boom in the country has brought about an impressive agricultural growth, putting pressure on domestic suppliers of fertilizers with demand outstripping supply, whereas local producers scramble to maximize their production to meet the rising demand. Fertilizer demand likely to raise by 5 percent in Pakistan this trend in fertilizer demand push to the increased availability of cultivation area and farm loans besides the income of the peasants. Despite rise in demand, local production of fertilizers was expected to remain raging between 4.7-5.2 million tons, which might spur the import of 1 million tons of fertilizers in the next fiscal year for meeting the shortfall.



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Urea MarketUrea Market The urea market posted a modest growth of 1% over last year with off-take of 5,236 thousand tonnes as compared to 5,179 thousand tonnes during 2005. Industry urea production of 4,803 thousand tonnes during the year improved by 2% over last year’s production of 4,693 thousand tonnes. Di - Ammonium Phosphate (DAP) - Market The industry carried 292 thousand tonnes of DAP at the beginning of the year. 846 thousand tonnes were imported during 2006 while 450 thousand tonnes, at almost last year’s level, were supplied by FFBL. DAP market during the year was recorded at 1,517 thousand tonnes, comprising imported stock and indigenous production, which improved by 11% over last year’s sales of 1,367 thousand tonnes.

FUTURE OUTLOOK: The future outlook of the fertilizer sector is very strong because of supportive government policies, favorable climatic conditions and gas pricing. The Economic Coordination Committee (ECC) has directed Sui Northern Gas Pipelines Limited (SNGPL) to market an additional 100 million cubic feet a day (mmcfd) of natural gas from the Qadirpur gas field, close to both Engro and the FFC. Short term outlook appears encouraging with significant projections for strong demand for our fertilizers. In the long term, the Company is committed to achieve sustained levels of operations at demonstrated operating efficiencies through focus on their fundamental strengths. Customs duty of 5% was withdrawn from imported urea. A similar withdrawal was done on imported DAP fertilizer last year this will not affect local manufacturers The medium to long term projected demand supply gap situation together with commissioning of their BMR projects with enhanced urea production capacities would further consolidate their market presence and allow improved returns to the Company and its stakeholders.

0

1000

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6000

2002 2004 2006

Off takes

Imports

DomesticProduction



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COMPANY ANALYSISCOMPANY ANALYSIS

FAUJI FERTILIZER COMPANY LIMITED: FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial authorized capital of the company was 813.9 Million Rupees. Additionally, FFC has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited). FFC commenced commercial production of urea in 1982 with annual capacity of 570,000 metric tons.

• Through De-Bottle Necking (DBN) program, the production capacity of the existing plant increased to 695,000 metric tons per year.

• Production capacity was enhanced by establishing a second plant in 1993 with annual capacity of 635,000 metric tons of urea.

• FFC participated as major shareholders in a new DAP/Urea manufacturing complex with participation of major international/national institutions. The new company Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited) commenced commercial production with effect from January 01, 2000. The facility is designed to produce 551,000 metric tons of urea and 445,500 metric tons of DAP.

• In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo. This acquisition at Rs. 8,151 million represents one of the largest industrial sector transactions in Pakistan

EXISITING PRODUCTION FACILITIES: Plants I & II (Goth Machhi): The Plants delivered stellar performance during the year with aggregate "Sona" urea output of 1,570 thousand tonnes despite maintenance turnarounds of both plants. Plant I

Shareholding Pattern13%

10%

1%6%

12%48%

10% Indivisual

InvestmentCompanyJoint StockCompanyFinancialInstitutionsOthers

CharitableTrustInsuranceCompanies



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delivered 809 thousand tonnes operating at 116%of design while Plant II produced 761 thousand tonnes of urea at 120% of designed capacity. BMR of Plant I and II at Goth Machi was being prepared. Unit 1 at Goth Machi was contributing 37 per cent and Unit II was making 32 per cent contribution to the total capacity. Energy revamp project at Plant-I was successfully and safely implemented during Turnaround 2006 resulting in energy conservation estimated at over Rs 50 million per annum. Plant II Debottlenecking study report on aMDEA section has been finalized with licensor, BASF, for 115% and 120% plant load and contract is under review especially for performance guarantees & liabilities. Plant III (Mirpur Mathelo): Highest ever daily urea production of 2.2 thousand tones was achieved in January 2006 through technical excellence, dedication and coordinated team work. Total output by the plant was recorded at 726 thousand tonnes, the highest ever, which represented 126% of design and improved by 2 % over last year’s production. Basic Engineering Design Package of Plant III Debottlenecking project has been approved in consultation with the licensor M/s Snamprogetti, Italy. Work on detailed engineering and ordering of equipment/ material is in progress to improve plant profitability through capacity enhancement and reliability improvement.

FFC CAPACITY EXPANSION PROJECT:

Fertiliser companies are pursuing plans to expand capacity in order to benefit from higher urea demand. FFC is currently conducting de-bottlenecking of its existing plant III (situated at Mirpur Mathelo), which, analyst estimate would add between 60,000 to 75,000 tons to its total urea capacity. Analysts’ reports suggest that the exercise would be completed by the end of 2007. Unit 3 Mirpur Mathelo contributes 574,000 tons, representing 30 per cent to the capacity. Estimated cost of the project amounts to somewhere around Rs2bn. With the completion of this expansion, total capacity of the company would increase to 1,964,000 tons.

PAST PERFORMANCE:

02468

1012

2003 2004 2005 2006

Rs.

0

5

10

15

20

EPS P/E Ratio

The overall financial position of the company is stable, over the year which is one of the reason of high efficiency and profitability of FFC. All the profitability ratios are also showing increasing trend on the back of



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increasing Sales as well as Gross profit which is because of good investments by the company in high yielding projects. Leverage and Liquidity ratios related to FFC are also improving from past to present. If the company would be able to continue its current stability and investments in profitable projects then the company would be able to increase its market share as well as Profitability.

increasing Sales as well as Gross profit which is because of good investments by the company in high yielding projects. Leverage and Liquidity ratios related to FFC are also improving from past to present. If the company would be able to continue its current stability and investments in profitable projects then the company would be able to increase its market share as well as Profitability.

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%age

2003 2004 2005 2006

ROE ROA

MARKET POSITION: MARKET POSITION: Market Share of Phosphatic

Fertlizer

54%

46%

FFC+FFBL OTHERS

Market Share of Urea

49%51%

FFC OTHERS

MARKET PARTICIPATION OF FFC IN UREA MARKET:

0 5000

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In Billion

2003 2004 2005 2006

Sales Gross Profit



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DIVIDEND POLICY: The dividend per share is expected to increase in the year to come because of following

points, BMR projects, Capacity expansion plans and equity investment in Local as well as Overseas, high yielding projects ( FFBL, PMP). The DPS is also expected to increase because Sales and PAT are also showing increasing trend on year on year basis.

02

46

81012

141618

%age

2003 2004 2005 2006

Dividend Yeild

Dividend Yeild

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60

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140

Rs.

2003 2004 2005 2006

MV/Share

MV/Share

VALUATION:

2003 2004 2005 2006 DIVIDEND PER SHARE (Rs.) 10.00 15.00 12.00 10.00 DIVIDEND PAYOUT (% age) 81.57 123.48 133.12 106.44



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INCOME STATEMENT:



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BALANCE SHEET:



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CASH FLOW STATEMENT :



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KEY RATIOS:

Report prepared by : Syed Iflahuddin Danish Research Department: Multiline Securities (Pvt.) Ltd. Email: [email protected] Website: www.multilinetrade.com Disclaimer: This document has been prepared by Multiline Securities (Pvt.) Ltd. This document should not be constructed as, an offer to sell or solicitation to buy any securities. This information has been complied from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. We accept no liability whatsoever for any loss arising from any use of these levels.

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fauji fertilizer company limited

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