In Focus: Fauji Fertilizer Co Ltd. (03122008)

Being a market leader in domestic urea sales, FFC holds a distinctive position with low business risk as well as low cost of production relative to other domestic producers. FFC is the parent company of FFBL and maintains a diversified product portfolio which gives the company an edge to take advantage from any type of paradigm shift in demand of both extensively used fertilizers.
Stagnant market share of 44 percent in domestic urea off-takes
FFC current market share stands at 44 percent in urea segment, while combined capacity of its 3 urea plants is 1.907 million tpa, however the optimum average capacity utilisation of FFC urea plants is 120 percent. Because of tight demand of urea in domestic market during FY08, FFC has postponed its BMRE operations to next year which was schedule in May08 in order to tap the huge demand incentive in the domestic market during CY08. This BMRE operation will increase the FFC capacity by 158k tpa.
Top line expected to grow by CAGR of 4 percent during FY08-12
Our outlook for FFC is bullish since it is the market leader in urea segment, we expect that FFC top line earnings will grew by CAGR of 4 percent during FY08-12, while the company will maintain the gross margin of 41 percent during FY08-12. FFC and its subsidiaries has combined stake of 50 percent in Pak Marroc Phos(PMP) which is the phos acid producing company in Morocco, the company has started its operation in May08, and dividends are expected to start flowing from next year.
12 percent dividend yield makes FFC more attractive
FFC posses the dividend yield of 12 percent with average payout ratio of 99 percent in previous 2 years. As urea market is expected to remain bullish, the company is expected to maintain strong dividend payouts ratio over next 5 years, which is to stand around 85 percent. Since the company is less leveraged, increase in financial cost will not affect the dividend stream, however decline in dividend income of FFBL due to any further drawback in DAP sales may affect FFC payout ratio.