Fauji Fertilizer Company Limited

Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

FAUJI FERTILIZER COMPANY LIMITED Recommendation

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The share is trading at around 6.73% discounts to our DCF based fair value of Rs. 125.82 per share and PE multiple of 12.50. We recommend a buy.

Contents Industry Analysis •

Introduction--Fertilizer Industry(2) • •

• • •

Introduction Product line of Fertilizer Sector Chart describing the Production by Manufacturers

Demand Analysis(3) • •

Overall demand of Fertilizer Product wise demand

Future Outlook(4)

Company Analysis •

• • • • • • • •

Shares outstanding (mn)

493.474

Market Capitalization

57.933 bn

Market Value Added

44.97 bn

Free Float Shares (mn)

246.5

Free Float Rs (bn)

28.93

BV/ Share

26.25

PE (x)

12.50

P/BV

4.47

* prices of 15-May-07 are used

Fauji Fertilizer Company Limited—Introduction(5) • Shareholding Pattern. • Existing Production Facilities. • FFC Capacity expansion Plans. Past Performance(6) Market Position(7) • Market Participation of FFC in Urea Market. Dividend Policy(8) Valuation(8) Income Statements(9) Balance Sheet(10) Cash Flow Statement(11) Key Ratios(12)

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

INDUSTRY ANALYSIS

INTRODUCTION—FERTILIZER INDUSTRY: Pakistan’s economy is agro-based; however our cultivable land is deficient in nutrient contents. This deficiency can only be overcome through the balanced use of fertilizer. Presently, there are ten manufacturing units in Pakistan. Out of these, four units are located in the public sector and six are operating in the private sector. The province-wise PRODUCT LINE OF distribution of units confirms that 5 units are FERTILIZER IN PAKISTAN: Nitrogen 46% (Urea) located in Punjab, 3 in Sindh and 2 in the NWFP. Calcium Ammonium Nitrate (26% . Fertilizer production is concentrated in Nitrogen) (CAN) nitrogenous fertilizers, which comprises 85% of Nitrophas (23% Nitrogen and 23% Phosphorus) (NP) all fertilizers produced in the country. Although Single Super Phosphate, (18% other types of fertilizers are also produced in Phosphorus) (SSP) Pakistan, the bulk of whose demand is imported. Di-Ammonium Phosphate (18% The main reason for this concentration on Nitrogen and 46% Phosphorus) (DAP) nitrogenous fertilizers is that its main raw Sulphate of Potash (SOP) - (Potash material i.e. natural gas is cheaply available in the fertilizer) country. The raw material for other fertilizers NPK in different ratios - (Mixed such as potassium and phosphate has to be fertilizer) imported. The local fertilizer companies meet almost 80% of Pakistan’s Fertilizer requirement. The total installed capacity is over 5,124 million tones /annum. It mainly comprises of 4,180 million tonnes for urea and remaining for NP, DAP, CAN and SSP. Fertilizer De m and

1600 1400 1200 1000 800 600 400 200 0

20%

Total Fertilizer Sales Revenue

80%

2002 2003 2004 2005 2006 Local Manuf acturer

Import

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

DEMAND ANALYSIS: The economic boom in the country has brought about an impressive agricultural growth, putting pressure on domestic suppliers of fertilizers with demand outstripping supply, whereas local producers scramble to maximize their production to meet the rising demand. Fertilizer demand likely to raise by 5 percent in Pakistan this trend in fertilizer demand push to the increased availability of cultivation area and farm loans besides the income of the peasants. Despite rise in demand, local production of fertilizers was expected to remain raging between 4.7-5.2 million tons, which might spur the import of 1 million tons of fertilizers in the next fiscal year for meeting the shortfall.

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

Urea Market The urea market posted a modest growth of 1% over last year with off-take of 5,236 thousand tonnes as compared to 5,179 thousand tonnes during 2005. Industry urea production of 4,803 thousand tonnes during the year improved by 2% over last year’s production of 4,693 thousand tonnes.

6000 5000

Off takes

4000 3000

Im ports

2000 Dom estic Production

1000 0 2002

2004

2006

Di - Ammonium Phosphate (DAP) - Market The industry carried 292 thousand tonnes of DAP at the beginning of the year. 846 thousand tonnes were imported during 2006 while 450 thousand tonnes, at almost last year’s level, were supplied by FFBL. DAP market during the year was recorded at 1,517 thousand tonnes, comprising imported stock and indigenous production, which improved by 11% over last year’s sales of 1,367 thousand tonnes.

FUTURE OUTLOOK: The future outlook of the fertilizer sector is very strong because of supportive government policies, favorable climatic conditions and gas pricing. The Economic Coordination Committee (ECC) has directed Sui Northern Gas Pipelines Limited (SNGPL) to market an additional 100 million cubic feet a day (mmcfd) of natural gas from the Qadirpur gas field, close to both Engro and the FFC. Short term outlook appears encouraging with significant projections for strong demand for our fertilizers. In the long term, the Company is committed to achieve sustained levels of operations at demonstrated operating efficiencies through focus on their fundamental strengths. Customs duty of 5% was withdrawn from imported urea. A similar withdrawal was done on imported DAP fertilizer last year this will not affect local manufacturers The medium to long term projected demand supply gap situation together with commissioning of their BMR projects with enhanced urea production capacities would further consolidate their market presence and allow improved returns to the Company and its stakeholders.

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

COMPANY ANALYSIS FAUJI FERTILIZER COMPANY LIMITED: FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial authorized capital of the company was 813.9 Million Rupees. Additionally, FFC has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited). FFC commenced commercial production of urea in 1982 with annual capacity of 570,000 metric tons. • • •

•

Through De-Bottle Necking (DBN) program, the production capacity of the existing plant increased to 695,000 metric tons per year. Production capacity was enhanced by establishing a second plant in 1993 with annual capacity of 635,000 metric tons of urea. FFC participated as major shareholders in a new DAP/Urea Shareholding Pattern Indivisual manufacturing complex with 10% 13% participation of major Investment Company international/national institutions. 10% Joint Stock The new company Fauji Fertilizer Company 1% Bin Qasim Limited (formerly FFCFinancial 6% Institutions Jordan Fertilizer Company Others Limited) commenced commercial 48% 12% Charitable production with effect from Trust January 01, 2000. The facility is Insurance Companies designed to produce 551,000 metric tons of urea and 445,500 metric tons of DAP. In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo. This acquisition at Rs. 8,151 million represents one of the largest industrial sector transactions in Pakistan

EXISITING PRODUCTION FACILITIES: Plants I & II (Goth Machhi): The Plants delivered stellar performance during the year with aggregate "Sona" urea output of 1,570 thousand tonnes despite maintenance turnarounds of both plants. Plant I

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

delivered 809 thousand tonnes operating at 116%of design while Plant II produced 761 thousand tonnes of urea at 120% of designed capacity. BMR of Plant I and II at Goth Machi was being prepared. Unit 1 at Goth Machi was contributing 37 per cent and Unit II was making 32 per cent contribution to the total capacity. Energy revamp project at Plant-I was successfully and safely implemented during Turnaround 2006 resulting in energy conservation estimated at over Rs 50 million per annum. Plant II Debottlenecking study report on aMDEA section has been finalized with licensor, BASF, for 115% and 120% plant load and contract is under review especially for performance guarantees & liabilities. Plant III (Mirpur Mathelo): Highest ever daily urea production of 2.2 thousand tones was achieved in January 2006 through technical excellence, dedication and coordinated team work. Total output by the plant was recorded at 726 thousand tonnes, the highest ever, which represented 126% of design and improved by 2 % over last year’s production. Basic Engineering Design Package of Plant III Debottlenecking project has been approved in consultation with the licensor M/s Snamprogetti, Italy. Work on detailed engineering and ordering of equipment/ material is in progress to improve plant profitability through capacity enhancement and reliability improvement. FFC CAPACITY EXPANSION PROJECT: Fertiliser companies are pursuing plans to expand capacity in order to benefit from higher urea demand. FFC is currently conducting de-bottlenecking of its existing plant III (situated at Mirpur Mathelo), which, analyst estimate would add between 60,000 to 75,000 tons to its total urea capacity. Analysts’ reports suggest that the exercise would be completed by the end of 2007. Unit 3 Mirpur Mathelo contributes 574,000 tons, representing 30 per cent to the capacity. Estimated cost of the project amounts to somewhere around Rs2bn. With the completion of this expansion, total capacity of the company would increase to 1,964,000 tons.

PAST PERFORMANCE:

20

12 10

15

The overall financial position of the company is stable, over the year which is one of the reason of high efficiency and profitability of FFC. All the profitability ratios are also showing increasing trend on the back of

Rs.

8

10

6 4

5

2 0

0 2003

2004 EPS

2005

2006

P/E Ratio

6

Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

increasing Sales as well as Gross profit which is because of good investments by the company in high yielding projects. Leverage and Liquidity ratios related to FFC are also improving from past to present. If the company would be able to continue its current stability and investments in profitable projects then the company would be able to increase its market share as well as Profitability. 40 30000 35 25000

30

20000

In Billion

25

%age

15000

20 15

10000

10

5000

5

0

2003

Sales

2004

2005

2006

0

2003

2004

ROA

Gross Profit

2005

2006

ROE

MARKET POSITION: Marke t Share of Phos phatic Fertlizer

Marke t Share of Urea

46%

49%

54%

FFC+FFBL

OTHERS

51%

FFC

OTHERS

MARKET PARTICIPATION OF FFC IN UREA MARKET:

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

DIVIDEND POLICY: The dividend per share is expected to increase in the year to come because of following 2003 2004 2005 2006 DIVIDEND PER SHARE (Rs.) 10.00 15.00 12.00 10.00 DIVIDEND PAYOUT (% age) 81.57 123.48 133.12 106.44 points, BMR projects, Capacity expansion plans and equity investment in Local as well as Overseas, high yielding projects ( FFBL, PMP). The DPS is also expected to increase because Sales and PAT are also showing increasing trend on year on year basis. Dividend Yeild

MV/Share

140

18

120

16 14

100

12

%age

10

Rs.

8

80 60

6

40

4 20

2 0

0

2003

2004

2005

Dividend Yeild

2006

2003

2004

2005

2006

MV/Share

VALUATION:

8

Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

INCOME STATEMENT:

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

BALANCE SHEET:

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

CASH FLOW STATEMENT :

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Multiline Securities (Pvt.) Ltd Stock Exchange Office: Room No. 622, 6th Floor KSE Building, Stock Exchange Road, Karachi. Tel: 2440191-94 Corporate Office: A-1001, 10th Floor, Saima Trade Tower, I.I. Chundrigar Road, Karachi. Tel: 111-111-675

KEY RATIOS:

Report prepared by : Syed Iflahuddin Danish Research Department: Multiline Securities (Pvt.) Ltd. Email: [email protected]

Website:

www.multilinetrade.com

Disclaimer: This document has been prepared by Multiline Securities (Pvt.) Ltd. This document should not be

constructed as, an offer to sell or solicitation to buy any securities. This information has been complied from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. We accept no liability whatsoever for any loss arising from any use of these levels. 12