AKD Quotidian about —: 4QCY11 off to rocky start for Fertilizers

Karachi: The escalating power crisis, particularly in Punjab has led to gas supply suspension to SNGP supplied fertilizer plants, including ENGRO’s new urea plant.

According to AKD Securities, while they had anticipated a shutdown for gas curtailment in 4QCYII, the recent shutdown has come at least a month in advance as the authorities grapple with violent power protests. As has been witnessed in the past, manufacturers are likely to respond with a urea price hike, where smaller players like Agritech (AGL) have already announced a significant increase of PkR422/bag last week (PkR364Ibag ex-GST), following their gas supply suspension.

Another urea price hike on cards: Fertilizer manufacturers, particularly ENGRO are likely to flex their muscles and announce another urea price hike after the latest round of gas curtailment. While the previous price hikes had already incorporated a 45 day winter shutdown, gas curtailment beyond the 45-day window would certainly invite another price hike, which seems to be the case now. To manufacturers’ advantage, international urea prices have refused to budge even after recent downward correction in commodities with Urea Arab prices remaining stable at US$520/ton over last three weeks. Stable urea prices in addition to PkR depreciation have further augmented the fertilizer manufacturers’ bargaining power.

FFC seems to be the safest bet: Luxury of uninterrupted gas supply would leave the Mari supplied players (particularly FFC and FATIMA) as the clear winners in the current scenario. AKD Securities has provided an EPS sensitivity analysis for urea price increase for 4QCY11 for AKD Securities’ fertilizer cluster. As for ENGRO, AKD Securities has already incorporated a 45-day shutdown in 4QCY11. Based on AKD Securities’ sensitivity, a PkR100/bag increase would result in 4QCY11 EPS for ENGRO, FFC, and FFBL to increase by PkRO.91, PkRO.78, and PkRO.15 respectively. Over the long ten ii, ENGRO earnings are most sensitive to urea price movements amongst AKD Securities’ fertilizer cluster companies where a 1% change in urea price leads to a 9% change in EPS for ENGRO, compared with 5% and 3% for FFC and FFBL, respectively.

DAP price rise is also a possibility: The phosacid contract price for 4QCY11 is also to be announced soon, where it is likely that contract prices are likely to be increased. FFBL may raise DAP prices to compensate for the higher phosacid cost where AKD Securities has assumed a 4QCY1 1 DAP-phosacid primary margin of US$250/ton. Besides potential for increase in phosacid cost, PkR depreciation as well as US$25/ton increase in DAP cfr prices last month may lead to an increase in DAP prices. Just to recall, a US$10/ton change in DAP-phosacid primary margins would result in an EPS change of PkRO.35 for FFBL. At current levels, AKD Securities reiterates its BUY stand on FFC and ENGRO with respective target prices of PkR198 and PkR183. As for FFBL, AKD Securities recommends SELL with a target price of PkR55, although upside risks remain from higher than expected DAP-phosacid primary margins.

Leave a Reply