Fertiliser: FAUJI FERTILIZER COMPANY LIMITED - Analysis of Financial Statements Financial Year 2005 - 3Q Financial Year 2010
The agriculture sector of Pakistan depicted a growth of 4.7% in 2009 as compared to 1.1% witnessed last year. Consequentially, fertiliser demand in Pakistan increased substantially as compared to last year; urea in particular witnessed 18% year on year growth during the year ended 2009.
This growth trend is attributable to increased urea availability as compared to last year. Substantially large quantity of 1,560 kilo tonnes urea was imported in the Country during 2009 which was the highest ever. Industry urea production of 5,048 kilo tonnes and sales of 6,446 kilo tonnes during 2009 were also the highest ever.
All time high industry's DAP sales of 1,767 kilo tonnes in the domestic market during 2009 registered a growth of 128%. High DAP sales were mainly because of low domestic prices in 2009, better availability, application of DAP in lower quantities during 2008, better crop yields and anticipation of DAP price increase in the domestic market due to price recovery in the international market. DAP production during the period was 540 kilo tonnes and DAP imports were 981 kilo tonnes.
Fauji Fertiliser Company Limited 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 authorised capital of the company was 813.9 million rupees. The present share capital of the company stands at Rs 3.0 billion. Additionally, FFC has Rs 1.0 billion stakes in the subsidiary Fauji Fertiliser Bin Qasim Limited (formerly FFC-Jordan Fertiliser Company Limited).
Fauji Fertiliser Company is committed to play its leading role in industrial and agricultural advancement in Pakistan by providing quality fertilizers and allied services to its customers and given the passion to excel, take on fresh challenges, set new goals and take initiatives for development of profitable business ventures. During 2009, FFC sold 2.464 million tonnes of urea against 2.342 million tonnes last year, an improvement of 5%. Although sales of imported fertilizers were lower than last year, FFC ended the year by selling 2.505 million tonnes of fertilisers exceeding last year's performance by 2%.
RECENT RESULTS (3Q FINANCIAL YEAR 2010)
Net profit for the first nine months of the current year was recorded at Rs 7.02 billion representing an increase of 6% over the same period last year. The EPS for the period was Rs 10.35 and the company has announced a dividend of Rs 2.00 per share.
Overall sales at FFC rose by 11% in the 9-months compared to the corresponding period last year. This compares quite favorably with the average decline of 11% experienced in the industry. Sales of Sona Urea (company's flagship product) were recorded at 1.644 million tonnes, a decline of 12% compared to the 1.859 million tonnes sold during the same period last year due to the floods. The company's market share has declined from 50% to 48% in the urea market mostly due to industry expansion. Sales of DAP have also declined by 40% compared to corresponding period of last year. As such overall sales growth can be attributed to price increases rather than an increase in sales volume.
Gross Profit Margin for the period was 45% compared to industry average of 40% and Net Profit Margin was recorded at 25% compared to industry average of 26%. Thus while its gross margin was higher than the industry, the company lost this advantage due to its higher selling and administrative expenses.
Inventory, trade receivables and payables increased dramatically over the period and can be attributed to the severe flooding and consequent decline in demand for fertiliser. FFC enters the fourth quarter with the highest inventory amongst its peers. However, this increased inventory is likely to be off-loaded in the fourth quarter as demand recovers strongly as sowing for the rabi season gets underway.
Urea Production over the 9-month period stood at 1.865 million tonnes compared to 1,869 million tonnes produced in the whole of last year. This was achieved despite gas shortages that the company experienced between May and September 2010.
Cost of production rose by 6.24% over the period and is mainly attributable to a 24% increase in fuel and power costs.
FFC's debt/equity ratio is 1.5 compared to an industry average of 2.7 and thus FFC is much more comfortable than its rivals in the current high interest rate environment. The company's beta (a measure of stock volatility) is 0.738 compared to industry average of 0.894. Thus FFC's stock price is less volatile than the overall KSE-100 as well as its industry peers.
The company has taken two significant investment decisions over the first nine-months of this year. First, FFC invested Rs 450 million in FFC Energy Limited as a long term investment. This will help diversify the company's earnings and is a sign that management is on the lookout for further growth avenues. Second, FFC is currently in the process of acquiring Agritech which has a 7% share in the urea market and will help consolidate FFC's own market share of 48%. However, if the acquisition is successful, it will increase FFC's debt and consequently higher interest costs.
Capital expenditure on property, plant and equipment stood at Rs 1,352 million for the period, and marks a significant reduction over corresponding period last year. As such, the company has shifted its focus from expanding its core business organically to acquisition and diversification into new businesses.
FINANCIAL PERFORMANCE FINANCIAL YEAR 2005- FINANCIAL YEAR 2009
During the year FY09, the company recorded sales of Rs 36,163 million as compared to Rs 30,593 million, depicting an increase of 18.2% in sales over last year. This increase in sales is attributed to the fact that in order to meet the growing demand of feed for the growing population, FFC was operating its business at full capacity. The aggregate utilization of all three plants of the company during 2009 was 120%. The additional production of 142 thousand tonnes compared to last year was mainly due to De-Bottle Necking (DBN) of Plant III commissioned in early 2009.
The rise in sales volume and turnover of the company in 2009 more than offset the 13% increase in cost of sales, mainly due to increase in gas prices. Consequently, the gross profit of FFC registered an increase of 26.65% over last year, and the gross profit margin and net profit margin showed a Year-on-Year growth of 7.1% and 14.4%, respectively.
Similarly, the Return-on-Assets and Return-on-Equity ratios of FFC also showed an increase of 12.0% and 27.0%, respectively, as compared to the values of last year. The rise in ROA and ROE is mainly because of an increase in the company's net income as a result of good performance. Hence, we can see that in 2009 the overall profitability of FFC has gone up.
The current ratio of the company decreased by 12.8% in 2008, before showing a slight increase of 2.4% in 2009. Although both current assets and current liabilities of FFC increased in absolute terms during 2009, the Current Assets increased by 53.6% whereas Current Liabilities increased by only 51.0%, which contributed towards a rise in the current ratio and liquidity of the company. The rise in current assets was mainly to a drastic increase in short-term investments and cash and bank balances and the rise in current liabilities was mainly due to higher level of short-term financing in order to meet working capital requirements.
In terms of asset management, FFC has shown an improvement over last year, the inventory turnover has been reduced from 7 to 2 days. This shows that it takes FFC approximately 2 days to sell its entire inventory; hence, there is hardly any excess inventory sitting idle. This is because FFC has effectively matched the supply of its product with market demand. The Days Sales Outstanding has reduced from 13 to 4 days, due to a reduction in trade debts and other receivables showing an improvement in the firm's ability to collect its credit sales in a timely manner. This has reduced the operating cycle of the company from 13 to -1. The Sales/Equity ratio has also increased by 10.8% over last year due to an 18.2% increase in sales during 2009 versus only a 6.5% increase in equity. In 2009, total assets turnover of the FFC increased by 2%, since both sales and total assets increased from their previous year levels.
The debt-to-asset ratio of FFC has increased from 61.51% to 66.07%. This shows that the Company has increased its use of debt financing - the short-term borrowings of the company have increased by 95.52%, whereas the current portion of long-term financing has increased by 142.19% over last year. This rise in debt utilization resulted in order to meet working capital requirements and the Company's capital expansion plans. Due to greater use of debt, the times-interest-earned ratio of FFC has also reduced from 15.44 to 14.82, which has in effect lowered the Company's margin of safety. The debt-to-equity ratio of FFC has also increased by 21.8% during 2009. Consequently, the debt management performance of the Company has declined in 2009.
Earnings per share of the company showed a 30% increase this year, rising to Rs 19.24 as compared to Rs 14.8 during last year. The price earning ratio also increased from 6.1 to 7.92 this year. This is mainly due to rise in investment and dividend income of FFC. Investment income showed an increase of 53% due to higher available funds and returns, while dividend income registered an increase of 156% compared to last year yielding net contribution margin of 26% towards EPS and net of tax profit, which witnessed 35% increase for the year compared to 2008.
The market/book ratio of the company has also increased from 2.36 to 5.34 in 2009 - this shows that investors are willing to pay more than 5 times the book value for the company's stock. Overall, the profitability of FFC has improved significantly during 2009; this increase in profitability ratios indicates that FFC has high growth prospects for the future.
FUTURE OUTLOOK
Factors that will affect domestic fertiliser off-take in 2010 will be water availability, fertiliser prices, fertiliser imports, government fertiliser-related policies and crop production/prices (cotton, rice, wheat and sugarcane). Urea trade patterns will likely change as more importing countries expand domestic capacity in 2010. In Pakistan, the fertiliser sector currently consumes around 16% of the country's total natural gas output which is all set to increase to about 33% next year with the onset of the new plants; hence, the country needs to focus on gas exploration in order to augment supply and prevent any adverse impact on fertiliser production in future. Domestic fertiliser demand is expected to remain strong in the next cropping season on the back of higher farm income from recently harvested crops. The Government is expected to maintain its focus on the agriculture sector due to its significant contribution towards GDP, and critical issues like soil conservation, farm mechanisation, land reclamation, and plant protection.
Fauji Fertiliser Company Limited is focused on growth opportunities and continues to aggressively explore ways of improving profitability and minimizing business risks emanating from economic, market, and climatic conditions. However, in view of shortage of gas in the country and upcoming urea plants, further expansion and growth opportunities in production of urea by the company are limited.
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RATIOS
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PROFITABILITY 2005 2006 2007 2008 2009
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Gross Profit Margin 36.06% 32.42% 35.59% 40.40% 43.27%
Net Profit Margin 19.22% 15.48% 18.86% 21.33% 24.40%
Return on Assets 17.21% 16.90% 18.33% 20.44% 22.89%
Return on Common Equity 39.36% 35.78% 42.11% 53.11% 67.44%
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LIQUIDITY 2005 2006 2007 2008 2009
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Current Ratio 0.91 0.90 0.94 0.82 0.84
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ASSET MANAGEMENT 2005 2006 2007 2008 2009
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Inventory Turnover (Days) 8.0 12.0 14.0 7.0 2.00
Days Sales Outstanding 15.0 10.0 17.0 13.0 4.0
Operating Cycle 4.0 9.0 24.0 13.0 -1.0
Total Asset Turnover 0.90 1.09 0.97 0.96 0.94
Sales/Equity 2.05 2.31 2.23 2.49 2.76
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DEBT MANAGEMENT 2005 2006 2007 2008 2009
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Debt to Asset (%) 56.27% 52.77% 56.47% 61.51% 66.07%
Debt/Equity(%) 128.67% 111.71% 129.70% 159.82% 194.69%
Times Interest Earned 23.13 14.94 12.11 15.44 14.82
Long Term Debt to Equity (%) 27.19% 27.71% 39.55% 63.57% 58.21%
Debt to Equity 0.36 0.40 0.765972 30:70 26.74
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MARKET VALUE 2005 2006 2007 2008 2009
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Earning per Share (pre tax) 10.63 10.29 11.52 14.8 19.24
Price Earning Ratio 18.97 15.45 15.03 6.1 7.92
Dividend per Share 2.25 3.90 3.50 3.25 3.25
Market/Book Ratio 5.43 4.02 4.60 2.36 5.34
Number of Shares Issued (Millions) 493 493 493 493 679
Market Prices (Dec 30) 137.00 105.55 118.75 58.73 102.93
Book Value 25.21 26.26 25.80 24.90 19.28
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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