Fertilizer Sector: Impact of increase in gas prices for captive power plants

Fertilizer Sector: Impact of increase in gas prices for captive power plants

Global Securities Research : GoP decided to increase gas price for the captive power plants from PKR 488.23/mmbtu to PKR 573.28/mmbtu, representing an increase of 17.4% effective from Sep1’13. Moreover, the govt  decided to keep gas prices for all other sectors at the current level. On the positive side, the government decided not to increase the feedstock prices for the fertilizer sector and maintained them at the current level, which is likely to be taken positively by the market participants. In the following table, we have calculated the earnings impact on the fertilizer manufacturer if the price is not passed to the farmers and price increase/bag that will be required to keep the margins at the current level.

 

	EPS impact/quarter	Price increase/bag
FFC	(0.11)	19
Engro Corp	(0.17)	16
Source: Global estimates

Outlook

At the current price of PKR 109/share, FFC provides an upside of 16% to our Dec13 TP of PKR 126/share, along with a dividend yield of 13%. We have a BUY recommendation on the scrip.

 

Fauji Fertilizer Bin Qasim (FFBL)

Assuming a production ratio of 72% DAP and 28% Urea, the following table provides a sensitivity analysis of the recent hike in gas prices.

 

	4Q CY13E (Pre-Hike)	4Q CY13E (Post-Hike)	% Change
Gas Price	488.23	573.28	17
EPS (PKR)	2.04	1.98	(3)

       Source: Global Estimates

 

The company’s DAP prices are at a premium to the international DAP prices; hence, the company has little to no pricing power on it’s DAP sales. Since Urea usually comprises ~20% of total company’s revenue, the company will likely not be able to offset the entire impact of the gas price hike by just increasing its urea prices.

 

Outlook

At the last close of PKR 40.38/sh, the stock offers an upside of 9% to our Dec13 TP of 44/sh, along with a dividend yield of 14%. BUY!