In focus: Fauji Fertilizer Bin Qasim Ltd Revised (26052008)

Fair value: RS 42
Investment strategy: “Buy and Hold”
Our DCF valuations intend us to hold a “Positive stance” for the scrip as we have projected Rs42 fair value for FFBL considering the latest tightening of monetary policy and its effect on risk relative market rates mechanism.
Despite of increasing front line revenue proceeds due to high value of sales, the bottom line is expected to conclude at Rs3.58 in FY08 (Rs2.71 FY07) due to rising raw material cost of the main fertilizer products. On these levels, the scrip is currently trading at the PE levels of 9.85x and counts the upside potential of 19 percent in medium term.
In 1Q08, FFBL posted the PAT of Rs162.09 million and EPS of Rs0.17 due to low volumes of sales in first quarter. The reason behind these low sales was intent of substitution because of high DAP prices that reached to Rs2,278/50 kg bag (in march) and low liquidity in hand by the farmers.
Rationales Urea
Considering the 1Q08, the Industry total urea sales have increased by 62 percent relative to same period last year. The reason for this high increase in Urea off-takes is the slump in demand of Phosphate and Potash fertilizers because of rapid increase in their prices in both International and Domestic markets. However an increase of 13 percent in average urea prices in 1Q08 is also witnessed but the magnitude of increment is relatively quite less then the other alternatives.
DAP
In 1Q08 the total industrial off-takes of DAP fertilizers has been decreased by a 60 percent relative to same period last year. The reason of this decrease is the robust increase in prices in this quarter that reached to Rs2, 728 (per 50 kg bag) at the end of March, 08 showing the increase of 179 percent YoY. The reason for the increase in prices of DAP worldwide is the rising prices of Phosphoric acid (P2O5) that contributes 90 percent of the total raw material cost.