The global recession affected all sectors of the world including the agricultural sector. However, the effect on agriculture and fertilizer market seems over and it has started expanding again.
During 2009 unfavourable weather conditions persisted in some of the major agricultural regions. These include poor south west monsoon in India, persistent drought in Argentina, wet spring and autumn in US and dry conditions in the Black Sea area. The global recession lowered the use of nitrogen in the industrial sectors of the world, which in turn increased the supply of urea and other nitrogenous products of agriculture. Due to the dis-equilibrium in the demand and supply, the prices of urea and DAP dropped in the international market.
The urea industry of Pakistan had grown by 18% in 2009. It grew from levels of 5.5 million tons in 2008 to 6.5 million tons in 2009. The production of urea increased from 4.9 million tons in 2008 to 5 million tons in 2009 showing a growth of 1%. In 2009, government distributed urea through National Fertilizer Corporation. There was an increase in demand of urea in the local market due to better availability, timely announcement of the support prices and cultivation of the Bt cotton.
However, due to lack of proper infrastructure and dealer network, there were shortages in the country (although there was sufficient imported quantity of urea available). The locally produced branded urea sold at a premium over the company-suggested price during the year.
The DAP market in the country registered a growth of 128% in sales to levels of 1.8 million tons. Since the prices were low in the international market high quantities of DAP were imported in the country. Imports in 2009 stood 0.98 million tons as compared to 0.35 million tons in 2008.
High DAP sales were recorded in the domestic market due to lower prices, application of DAP in lower quantities in 2008 and anticipation of recovery of DAP prices in international market. Private DAP importers also continued importing DAP and due to large stocks they continuously offloaded stocks they had to dealers at attractive prices and also with credit facilities.
Fauji Fertilizer Bin Qasim Limited is a public limited company and its stocks are traded at all the three stock exchanges of the country. The company is in the business of manufacturing, purchasing and marketing of fertilizers, including investments in fertilizer raw material manufacturing operations. It commenced the commercial production in 2000 and is a subsidiary of Fauji Fertilizer Company with a shareholding of 50.88%. The DAP plant has a capacity of 600,000 tons whereas the urea plant has a capacity of 551,100 tons. During FY09 the production of urea was 627,079 tons and that of DAP was 540,096 tons.
The company has a share of 10% in the Urea market and a share of 40% in the DAP market which makes it the market leader. The graph below shows the share of different players in the market of DAP and urea.
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2010 2009
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(Rs '000')
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Sales-net 11,919,342 14,998,293
Cost of sales (8,082,756) (12,048,911)
Gross Profit / (loss) 3,836,586 2,949,382
Administrative Expenses (208,207) (185,784)
Other Income 493,227 96,138
Taxation (788,950) (394,710)
Profit after Tax 1,722,009 497,908
Earnings per Share (Rs) 1.84 0.53
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RECENT RESULTS 1H10
Net sales stand at Rs 11.919 billion, having declined 20.53% from the corresponding period in 2009.
The primary reason for the slackened sales of Urea was the marked increase in Urea prices (Rs 50 per bag; Rs 20 to cover for the increased fuel gas prices and Rs 30 to cover for inflation). Urea demand remained the highest ever at the beginning of the year and branded as well as imported Urea remained adequately available in the market.
During 1H10, Urea production was 2,530 thousand tons, 5% higher than in the same period last year. However, ending inventory was also 39% higher than in 1H09, indicating slower sales than the in previous year. For FFBL, Sona Urea sales for 1H10 were 260 thousand tons, 7% lower than in 1H09.
Declining DAP sales were caused by a fall in demand during January-Jun 2010. The industry sales have fallen to 37% from the comparative period in 2009. Moreover, a 45% increase in DAP prices from Rs 1,760 per bag to Rs 2,560 per bag also adversely affected DAP use by farmers. In addition, international DAP prices have been on a constant decline, due to which local dealers are reluctant to hold excessive inventory on hand. FFBL Sona DAP sales stand at 143 thousand tons in 1H10, 43% lower than in 1H09.
Gross profit for the period January-Jun 2010 was Rs 3.836 billion, 30% higher than in 1H09. Selling, distribution and administrative expenses have shown remarkable increase over the year. However, owing to a better liquidity position of the company and less utilization of working capital lines, the finance cost declined substantially from Rs 998 million in 1H09 to Rs 666 million in 1H10. Similarly, due to better treasury management on available funds, other income increased 414% (YoY) to Rs 493 million in the period in question. This consisted mainly of income on bank deposits and mutual funds. The company also made a small profit its Pakistan Maroc Phosphore plant. As a result, net profit in 1H10 stands at Rs 1.772 billion, 246% higher compared to 1H09. EPS of the company recorded at Rs 1.84.
The performance of the plant assets showed improvement in 1H10. Production of Ammonia and DAP stood 3% and 40% higher respectively than in the same period last year. Seven percent decline in urea production is explained by the gas curtailment scheme of the government.
FFBL anticipates that price hikes in the near future will be detrimental to the off-take of DAP sales. Along with the gas curtailment and other policies being adopted by the government to control energy usage, this is likely to negatively affect the profits of the company. Moreover, specialists argue that fertilizer demand is likely to fall drastically in light of the floods that recently ravaged Pakistani lands and left behind arable soil. This may mean that for a few years, FFBL may have to shift focus to exporting fertilizer.
FINANCIAL PERFORMANCE FY05-09
FFBL had sales of 627 thousand tons of Urea in FY09; the entire production of Sona Urea was sold. It had sales on 709 thousand tons of DAP which were the highest ever annual sales by the company for DAP. Also, in FY09 highest ever daily shipment of 7105 metric tons ex-FFBL was made on October 28, 2009; which consisted of 3440 metric tons of Sona Urea and 3665 metric tons of Sona DAP.
In FY09 FFBL's profitability was on record levels, the sales revenue stood at Rs 36.7 billion growing by 37% over the FY08 levels. The reason for this improvement in sales was mainly due to improved DAP sales volume. DAP sales accounted for 76% of the total revenue whereas urea's share was 24% in total revenues in FY09. Their shares were 70% and 30% in FY08. The gross profit of the company in FY09 stood at Rs 9.7 billion with a margin of 26.3% as compared to that of 30.67% in FY08. This was mainly due to the completion of gas feed subsidy in year 2008. The decline in FFBL's performance in FY08 was cited to the inability to meet the DAP sales target due to the significant upsurge in phosphoric acid prices, devaluation of Pak rupee against the major currencies, delay in receipt of DAP subsidy claim from GoP and very high interest rates over much-needed short-term borrowings.
The total assets turnover of FFBL has shown tremendous growth and has grown from 0.57 in FY08 to 1.01 in FY09. This jump can be seen from the fact that the revenues of the company have shown a tremendous growth last year. They grew from the levels of Rs 26,821 million in FY08 to Rs 36,725 million in FY09. Also the revenues showed improved in FY08, they improved from Rs 12,243 million in FY07. Thus the growing revenues have been a major source for increasing total asset turnover. The total assets of the company declined from Rs 46,772 million in FY08 to Rs 36,225 million in FY09. The fixed assets of the company stood at Rs 18,279 million in FY08 as compared to 17,781 million in FY09. Thus the increase in revenue accompanied by the decline in fixed assets increased the fixed asset turnover of the company to 2.36 times in FY09 as compared to 1.69 times in FY08 and 0.74 in FY07. Within fixed assets decline was seen in property, plant and equipment and long term investments. Decline was seen in the value of the investment in joint venture Pakistan Maroc Phosphate S.A, Morocco. Cost of this investment is Moroccan dirhams 200,000 thousand which represents 25% interest in Pakistan Maroc Phosphore S.A Morocco (PMP), a joint venture between the Company, Fauji Foundation, Fauji Fertilizer Company Limited and Office Cherifien Des Phosphates, Morocco. The principal activity of PMP is to manufacture and market phosphoric acid, fertilizer and other related products in Morocco and abroad. The return on Assets of the company has also shown increase in FY09. It increased to 10.45% in FY09 as compared to 5.37% in FY08. Te reason for this has been the tremendous growth in profit after tax of the company. They grew from Rs 2900 million in FY08 to Rs 3784 million in FY09.
Major decline has been seen in the current assets of the company, which declined from a level of Rs 28,493 million in FY08 to 18,448 million in FY09. The decline was seen in balances due from GoP on account of DAP subsidy which decreased from Rs 12,440 million in FY08 to nil in FY09. This subsidy represented the DAP subsidy from the GoP in accordance with the Ministry of Food and Agriculture and Livestock (MINFAL) notification No 7-1/2006-Fert dated 29th September 2006. Another major decline was seen in the stock-in-trade, which declined from Rs 5,677 million in FY08 to Rs 1,227 million in FY09. The change was seen in the finished goods inventory, which declined from Rs 5,583 in FY08 to 171 in FY09. Even advances by the company saw a major growth; they grew from Rs 55 million in FY08 to Rs 94 million in FY09. These advances were given to the advances to suppliers and contractors. Also, the short term investments by FFBL grew from nil in FY08 to 4.4 million in FY09, which represented loans and receivables at amortized cost. These are the term deposits with banks and financial institutions. The current liabilities of the company have also shown a major decline in FY09. They declined from Rs 26219 million in FY08 to 16747 million in FY09. Major jump was seen in the levels of short-term borrowings, which declined from Rs 18,257 million in FY08 to 7,730 million in FY09. With in the short-term borrowings decline was seen in finance against trade receipts, which declined from Rs 9,939 million in FY08 to nil in FY09. The liquidity position of FFBL has remained consistent over the last three years. It stood at a level of 1.34 times in FY07 and moved to 1.10 times in FY09. But this has also shown a major decline from the FY05 level of 1.46 times. Similar has been the trend related with quick ratio it stood at 0.97 times in FY07 and moved to 0.92 times in FY09. However this has declined from 1.21 in FY05.
The debt equity ratio of the company has remained almost constant. The debt equity ratio was 49:51 in FY08, which has moved to 50:50 in FY09. The liabilities of the company both current and non-current have shown a remarkable decline in FY09. In non-current liabilities decline was seen in the long term financing which declined from Rs 625 million in FY08 to Rs 208 million in FY09. Also the long term Murabaha declined from Rs 58 million in FY08 to Rs 19 million in FY09. Long-term loans declined from Rs 5,186 million in FY08 to Rs 4,537 million in FY09. The long-term loan amount represents the GoP loan amortizing to Rs 9,723 million, which is repayable in equal installments in 16 years.
The EPS of the company had remained almost consistent from FY05 to FY08. Nevertheless it grew to Rs 4.05 in FY09 from Rs 2.62 in FY 05. This jump can be attributed to the increasing income of the company. The earnings growth in FY09 was 30.5% in FY09 as compared to 14.16% in FY08. The dividend per share for FFBL is Rs 2.25 for FY09, which is the same as that of FY08. This brings the payout ratio to 98.73% as compared to 91.91% in FY08. This payout has been the highest in last 5 years. The P/E ratio of the company has seen fluctuations. The P/E ratio declined in FY08 to 4.16 from 15.46 in FY07. However the ratio has improved in FY09 to 6.45. This has been because of the extraordinary low price of the stock in FY08. It declined from Rs 42.05 per share in FY07 to Rs 12.9 in FY08. The price recovered to Rs 26.13 per share during FY09. The graph below indicates the company's stock price has been moving in the same direction as that of the KSE-100 index for the last one year.
FUTURE OUTLOOK
FFBL plans to invest up to Rs 5 billion in four power projects. One of the projects is an independent 125 MW power generation company, which is in the development phase with an estimated project cost of USD 180 million and is likely to commence operations in 2012. Investments in three Wind Power Projects of 50 MW with as cost of USD 135 million is also under consideration. These projects are likely to commence operations by 2012-13.
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Financial Ratios 2005 2006 2007 2008 2009
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Gross Profit Margin % 32.01 31.85 39.39 30.67 26.32
After Tax Margin % 15.97 16.62 20.75 10.81 10.3
Net Sales (PKR Million) 14,255 14,707 12,243 26,821 36,725
Total Asset Turnover-Times 0.58 0.53 0.42 0.57 1.01
Fixed Asset Turnover-Times 0.98 0.99 0.74 1.69 2.36
Return on Total Assets % 8.11 7.19 7.4 5.37 10.45
Inventory Turnover- Days 24 33 34 61 47
Current Ratio 1.46 1.34 1.17 1.09 1.1
Quick Ratio 1.21 1.15 0.97 0.82 0.92
EPS 2.62 2.62 2.72 3.1 4.05
DPS 0.5 1.25 1 2.25 2.25
P/E Ratio Times 14.56 10.81 15.46 4.16 6.35
Market Price/ Share 38.25 28.3 42.05 12.9 26.13
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