Morning Briefing for Mar 13, 2012 – Standard Capital

Karachi: Fatima Fertilizer robust earnings; KASB Securities Limited’s recommendation SELL

A year ago Standard Capital picked Fatima Fertilizer (FATIMA) as KASB Securities Limited’s pick among other fertilizer sector stocks and overlooked Engro Corp given variety of reasons.

According to Standard Capital, the green field project, FATIMA, has finally succeeded and reported profits in CY11 wherein company posted Rs 4.2 billion as profit after tax (six month of commercial operations) as compared to after tax loss of Rs 163.639 million in the same period last year. FATIMA diluted EPS stood at Rs 1.85 in the period under review as against basic share loss of Re 0.07 in the same period a year ago while the company’s basic EPS stood at Rs 1.85 against per diluted share loss of Re 0.08.

The main highlight of the whole saga is the announcement of dividend of Rs 1.5/share which remained a topic of debate since this project is quite leveraged.

‘In order to comply with the covenants of loan agreement between the company and its lenders, the sponsors have offered to delay the payment of dividend by the company to them amounting to Rs 2.7 billion approximately until the company pays back principal amount of Rs 10 billion to its lenders (KASB Securities Limited’s understanding is that it will happen this year; the total loan payable is more than Rs 30bn as at 9MCY11).

However, public shareholders will be paid dividend amounting to Rs 300 million approximately in time as per covenants of loans, law and listing regulations. As mentioned earlier, FATIMA has planned to repay loan of Rs 10 billion from its own resources and refinance during the current year. The sponsors have also offered to delay payment of dividend on preference shares of the company on similar terms complying with the loan covenants. The company has decided to prepay its expensive long‐term loans of approximately Rs 10 billion by May this year. The mark‐up being charged on these loans are 6M KIBOR+3.75%. The portion of the prepayment will be achieved 50 percent through robust internal cash generation and 50 % through refinancing.’

How operations improved?
FATIMA cashed into ever‐rising urea prices that actually doubled in CY11. FATIMA remained beneficiary of market situation (since Engro Fertilizer, Agritech, and Dawood Hercules suffered given gas load management by govt.). FATIMA’s proximity to Mari gas remained the main tipping point that gave edge to 0.5mntons urea plant. FATIMA’s other inventory i.e. NP and CAN remained a partial success since farmer awareness is an issue in Pakistan.

SELL recommended based on High PE
Standard Capital sees a scenario wherein prices of urea may decrease during couple of months due to certain facts such as hoarding of the product by political bigwigs in rural areas and government apparent imports which may outsmart demand. Secondly, it’s already known that Engro Fertilizer’s new plant has started receiving its share of gas from Qadirpur along with other players and hence Standard Capital sees stable supplies of urea in the market. This all means that time of extra ordinary earnings has gone and FATIMA has to rely on voluminous growth in CY12. At present FATIMA is available at PE of 11.9x and Standard Capital recommends SELL.

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