The Bell FFBL: A mix of positives and negatives Gas curtailment hurt offtake in CY14 According to statistics released by NFDC, total offtake for FFBL declined by 8% YoY in CY14 primarily due to gas curtailment. The decline was witnessed across both product categories with urea and DAP offtake declining by 6% YoY and 9% YoY respectively. Weak margins to drag profitability FFBL is expected to post EPS of PKR4.30 in CY14, down 28% YoY. 4QCY14 earnings are expected at PKR2.40/sh, down 3% YoY. We believe that the company shall announce DPS of PKR2.15 along with the results, taking full year payout to PKR3.90/sh. Continued gas curtailment to warrant concerns FFBL has faced increasing gas curtailment over the years. Owing to continued gas curtailment, we have revised down our production estimates for the company from 978ktons to 935ktons for CY15 and going forward. The said revision has a negative EPS impact of PKR0.46 (↓8%) in CY15. Worst affected by gas tariff rationalization Recent news flow suggests that the GoP plans to increase feed and fuel gas tariff for fertilizer companies. We believe that the industry will be unable to pass on the entire impact of the cost hike on urea. Furthermore, FFBL will be the worst affected company within our fertilizer universe since it will have to absorb the entire cost hike on DAP. We have provided a sensitivity of CY15 EPS to tariff hike and urea price increase. Investments in wind power generation to accrue gains FFBL has invested in two 49.5MW wind power generation plants and holds 35% stake in each project respectively. Our discussions with company management indicate that one of the projects has come online in Dec-14 and the second one shall likely be commissioned by the end of Jan-15. The projects shall allow incremental EPS of PKR0.47/0.54 in CY15/16 and add PKR3.7/sh to our PT for FFBL. Coal power presents sizable upside from current investment case FFBL plans to establish a 118MW coal fired power generation plant. The plant will replace fuel stock requirement for FFBL from gas to coal while excess power will be sold off to the national grid. We expect that, post-commencement, the coal power plant will allow FFBL to operate its Urea and DAP plants at 65% and 114% utilization. According to our preliminary working, EPS impact of the coal project amounts to PKR1.02/1.42 in CY18/19. Tweaked estimates; Maintain Buy We have tweaked our estimates for FFBL and accounted for higher gas curtailment and wind power projects. Furthermore, we have also reduced our DR assumption for valuation to 8.5% and rolled forward our price target to Dec-15. Owing to the said revisions we increase our CY15/16 EPS estimates for the company by 0%/1% to PKR5.62/5.87 and increase our PT for the stock to PKR52/sh. The stock offers total return of 19% at last closing; we maintain BUY. However, our current investment case does not incorporate for gains accruing from the coal power project or earnings attrition from gas tariff hike. Elixir Securities
Posted on: Tue, 27 Jan 2015 06:05:33 +0000
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