FFBL upgraded to ‘Buy’; Dec-09 TP Rs28/sh Written as on September 28, 2009
• Outstanding offtake to remain key driver, margins to improve on lower int'l prices
• Better operating Cashflows to result through retired inventories
• Recommendation - upgraded to 'Buy' with Dec-09 TP of Rs28/sh
In today's Value Seeker, We have revised our full-year CY10 earnings expectation for FFBL to Rs3.61/sh. Moreover, in the light of recent offtake performance, we have upgraded our Dec-09 TP to Rs28/sh and recommend ‘Buy’ on the scrip.
Outstanding offtake to remain key driver
FFBL is to emerge as a direct beneficiary of revived DAP demand and much better offtake this year backed by favorable pricing scenario, improved water availability, better support prices and increased agriculture credit. During 8MCY09, FFBL showed an impressive revival in it's DAP offtake, which improved by ~1.2 time YoY. Moreover, the company was able to retire much of its previously accumulated DAP inventory which had built up last year due to poor offtake back then. Apart from DAP, FFBL's granular urea sales during Aug-09 also showed fresh revival, increasing by 24% YoY.
Margins expected to improve amid lower int'l prices
Favorable DAP pricing scenario is expected to bode well for FFBL in 3Q09. Though domestic prices have actually come down (-43% YoY in 3Q09), a greater turnaround was witnessed in int'l prices (-73% YoY). Additionally, int'l phosacid prices have also tumbled down by ~76% YoY in 3Q09, while domestic DAP prices are hovering ~46% above int'l prices. We expect company's gross margin to improve by ~8pps for 3Q09 on QoQ basis. Moreover, margins are expected to sustain at these levels in the 4Q09 since local demand is expected to remain robust during peak Rabi season, provided no turnaround in int'l prices comes around.
Better operating cashflows to result through retired inventories
Company's DAP inventory balances peaked in Sep08 at 253k tons due to virtually non-existent DAP sales that prevailed back then. Since then, FFBL has been able to retire bulk of its inventory due to revival in the offtake, with DAP inventory standing at only ~6k tons in Aug-09. Company's inventory turnover as a result has improved to ~6x in 1HY09 from last year's 2x, while further improvement is expected in the coming quarters. This will also help improve operating cashflows due to favorable working capital, alongside reducing burden of financial charges due to retirement of short term borrowings.
Recommendation - upgraded to 'Buy' with Dec-09 TP of Rs28/sh
Core reasons behind our value update for FFBL include (i) much improved volumetric growth (ii) higher domestic prices compared to int'l prices and improved margins (iii) compensation receivable from GoP reduced to Rs2bn from Rs12bn outstanding last year, thus improving cashflows (iv) diminishing inventory levels to improve working capital and short term borrowing is expected to retire further as a result of improved liquidity, thus reducing financial charges (-43% YoY expected). The scrip offers an upside potential of 15% against our revised Dec09 TP of Rs28/sh alongside current dividend yield of 13% a PE of 6.7x on our revised CY09 earnings estimates. We upgrade our recommendation to 'Buy' for FFBL.