Initiating Coverage: SUBSCRIBE

Fatima Fertilizer  Target Price: Rs14

  Fertilizer
st
1  Fertilizer offering since 1996 January 2010

Recommendation: Buy @ Rs10-11

We initiate our coverage on Fatima Fertilizer Company Limited (FFCL) with a fair JS Global Capital Limited
value of Rs14 per share and hence recommend investors to participate in the
Book Building process as the scrip offers a 40% upside at the floor price of Rs10
per share. FFCL is a joint venture between Arif Habib Group (AHG) and Fatima
Group (FG) with a nameplate capacity of 1.58mn tons diversifying in urea as well
as other fertilizers (phosphatic, calcium blended and potassium based). This
makes FFCL a different player considering the conventional urea and DAP
producers. With urea and CAN expected to operate at near full capacity in 2010,
the NP plant coming online in 2011 and high margins due to special 10 year
subsidy on feedstock gas we expect a 4 year earnings CAGR (2011-15) of 20%. Floor Price:
Rs10
Trading at a post full commissioning 2012F EV/EBITDA of 4.0x and PBV of 0.7x,
we recommend investors to bid in the Book building process in the range of Rs10- Offer size:
11 per share. The key risks to our thesis are: (1) delays and cost overruns (2) Book Building: 150mn shares
General Public: 50mn shares
disruption in gas supply (3) lower demand for NP & CAN and (4) integration and
regulatory issues. We however, rule out any concerns on excess supply of urea. Dates:
(For details please refer to page 6). Book Building: 11-13th Jan 2010
General Public: 27-28th Jan 2010
What’s on offer?
FFCL is issuing additional 200mn ordinary shares at a floor price of Rs10 through
a combination of 150mn shares (75%) in the Book Building Process (Jan 11-13)
to the Institutional Investors and High Net Worth Individuals (HNWI), while 50mn
shares (25%) will be issued subsequently to the general public (Jan 27-28) at or
below the strike price determined via the Book Building process. Arif Habib
Limited is the mandated Lead Manager & Book Runner for the issue.
Valuation: 40% upside at the floor price of Rs10 Table: Key numbers
2010E 2011F 2012F 2013F 2014F
Using the FCFF methodology with a risk free rate of 11% and WACC of 12%, our
fair value of Fatima arrives at Rs14, which implies a 40% upside at the book EPS (Rs) 0.1 1.1 1.3 1.2 1.6

building floor price of Rs10. Our liking for FFCL is also backed by the company’s PBV (x) 0.9 0.8 0.7 0.7 0.6
PE (x) NM 9.5 7.5 8.3 6.1
attractive 2012F EV/EBITDA and PBV multiples of 4.0x & 0.7x respectively, which
EV/EBITDA (x) 7.1 4.8 4.0 3.6 2.8
implies that FFCL is available at a discount of 67-74% to the fertilizer sector.
EV/ton (US$) 403.9 369.1 323.6 278.4 225.8
Profits to post a 4 year (2011-15) CAGR of 20% Source: JS Research
We project the company’s earnings to grow at a post full commissioning (2011-
2015) CAGR of 20% driven by a combination of gradual production build up with
NP plant coming online in 2011 and high margins due to special subsidy on feed
stock. Moreover, lower tax expense owing to accelerated capital allowance on the Farhan Rizvi, CFA
heavy capital expenditure will contribute towards strong earnings. [email protected]
Senior Analyst
Offer likely to witness a good response 92 (21) 111-574-111
(ext. 3096)
We believe the offer has decent merit at the floor price of Rs10 per share given its
attractive fundamental value of Rs14 and the strong goodwill of the AHG, the
main sponsor of the company. Moreover, given AHG’s IPO history with regards to Bilal Qamar
[email protected]
previous five offerings (over subscribed in the range of 1.1x-6.2x) and the
Analyst
performance of the last fertilizer IPO, FFBL in 1996 (oversubscribed 2.3x), we 92 (21) 111-574-111
expect a positive response for FFCL as well. (ext. 3099)

Completed on Jan 10, 2010 – Distributed on Jan 11, 2010 JS Research is available on Bloomberg, Thomson Reuters and CapitalIQ
Please refer to the important Disclaimer on the last page
Fatima Fertilizer Company Limited Page 2

                  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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January 2010
Fatima Fertilizer Company Limited Page 3

Contents

Valuation: 40% upside at floor price of Rs10 04

Public offering and our take 06

Fatima Fertilizer – what’s on the table? 07

Profitability; 4 year CAGR (2011-15) of 20% 09

Risks to our thesis 10

About the company 11

Appendices:

Appendix I: Income Statement & Balance sheet 12

Appendix II: Ratio Analysis 13

Appendix III: Book Building Procedures 14

Appendix IV: Production flow diagram 17

January 2010
Fatima Fertilizer Company Limited Page 4

Valuation: 40% upside at floor price of Rs10 Table: WACC assumption table
Cost of debt
Based on the discount cash flow methodology our fair value for FFCL arrives at K IBOR 11%
Rs14 per share. Hence we recommend investors to bid in the book building at the P remium 3%
floor price as it offers an attractive upside of 40%. We have also carried out a Tax rate 35%
sensitivity of valuation multiples at different price levels and recommend investors K (d) 9%
to subscribe in the range of Rs10-11 per share. Our valuation is based on FCFF Weight in WACC 56%
version of the DCF methodology with a risk free rate of 11% and WACC of 12%. Cost of equity
We have projected the free cash flows till 2020 and have forecasted the terminal Risk free rate 11%
value then onwards. The two key reasons for extending our forecast till 2020 are Risk premium 6%
the elimination of the deferred tax credit in 2017 and the expiry of special gas B eta 0.8
subsidy in 2019. (Please refer to the tables for details on the valuation assumption K (e) 16%
and calculations). Weight in WACC 37%
Cost of preference shares
Table: FCFF projections
K IBOR 11%
(Rs m n) 2010E 2011F 2012F 2013F 2014F
P remium 3%
Operating cashflow 6,523 10,067 11,121 10,578 11,276
K (p) 14%
Less:Capex (5,741) (400) (450) (450) (600)
Weight in WACC 7%
Interest income 64 103 251 401 511
WACC 12%
Tax paid - - - - -
S ource: JS Research
Free Cashflow to the firm 846 9,770 10,922 10,529 11,187
Discounted cashflow 755 7,790 7,776 6,694 6,351
V aluation
P V of cash flows 53,749
Terminal value 10,380
Total present value 64,129
Less: Debt & Pref. shares 36,473
E quity value 27,656
No of shares (mn) 2,000
Target price (Rs) 14
S ource: JS Research

Table: Strike price sensitivity analysis

2010E 2011F 2012F 2013F
Rs10 (Floor price)
P ri ce to Book (x) 0.9 0.8 0.7 0.7
P /E ratio (x) NM 9.5 7.5 8.3
E V/EBITDA (x) 7.1 4.8 4.0 3.6
E V/TON (US$) 403.9 369.1 323.6 278.4

Rs12
P ri ce to Book (x) 1.0 1.0 0.9 0.8
P /E ratio (x) NM 11.4 9.0 10.0
E V/EBITDA (x) 7.7 5.2 4.3 4.0
E V/TON (US$) 433.5 398.1 352.0 306.3

Rs14
P ri ce to Book (x) 1.2 1.1 1.0 1.0
P /E ratio (x) NM 13.3 10.5 11.6
E V/EBITDA (x) 8.2 5.6 4.7 4.3
E V/TON (US$) 463.0 427.0 380.4 334.1
S ource: JS Research

January 2010
Fatima Fertilizer Company Limited Page 5

67-74% discount to peers on 2012F EV/EBITDA and PBV

Pakistan’s listed fertilizer sector (as measured by the JS Universe) is trading at
2012F EV/EBITDA of 4.5x and PBV of 2.6x, while FFCL at its floor price of Rs10
has an EV/EBITDA and PBV multiple of 4.0x and 0.7x respectively. This implies
that FFCL trades at 67-74% discount to listed peers on EV/EBITDA and PBV.
This reiterates our positive recommendation for FFCL. (Please refer to the graphs
below for valuation comparison with listed peers).

G r aph: PBV( x ) c ompar is on G r aph: EV/ton( US$) c ompar is on G r aph: EV/EBIT DA( x ) c ompar is on

7.0 1,000 FFBL FFC 10.0 FFBL FFC

FFBL FFC Engro
6.0 Engro FFCL Engro FFCL
FFCL Sector * 800 8.0
5.0 Sector * Sector *
600 6.0
4.0
3.0 400 4.0
2.0
200 2.0
1.0
- - -
2010E 2011F 2012F 2013F 2010E 2011F 2012F 2013F 2010E 2011F 2012F 2013F
So urce: JS Research, *excl. FFCL So urce: JS Research, *excl. FFCL So urce: JS Research, *excl. FFCL

January 2010
Fatima Fertilizer Company Limited Page 6

Public offering and our take

FFCL is issuing additional 200mn ordinary shares at a floor price of Rs10 through
a combination of 150mn shares (75%) via the Book Building Process to the
Institutional Investors and High Net Worth Individuals (HNWI), while 50mn shares
(25%) will be issued subsequently to the general public at or below the strike price
determined in the Book Building Process. Arif Habib Limited is the mandated Lead
Manager (LM) & Book Runner (BR) for the issue.
The Book Building mechanism
Book Building is a process whereby investors bid for a specific number of shares
at various prices. The LM and the BR with the consent of the company set a floor
price which is the lowest price at which investors can bid. An order book is
maintained by the BR, which is used to determine the strike price using the “Dutch
Auction Method”. Under this methodology the strike price is determined by
lowering the price to the extent that the total number of shares subscribed equal
those offered by the company. Bidders can submit their bids at the allocated
bidding centers in person or through facsimile. A bid by a potential investor can be
a “Limit Bid”, “Strike Bid” or a “Step Bid”. (For more details on Book Building
process, please refer to Appendix A).
Our take on the offer: Attractive up to Rs11 per share
We believe, the offer has decent merit at the floor price of Rs10 per share given
its attractive fundamental value of Rs14 per share (please refer to the Valuation
section for more details) and the strong goodwill of the Arif Habib Group, the main
sponsor of the company. Moreover, this is a first public offering in the relatively
stable Fertilizer sector since 1996, when FFBL shares were offered to the General
Public, which were oversubscribed 2.3x. We do however, advise investors to not
bid above Rs11 per share as the attractiveness gets diluted above that level.
Arif Habib has a rich history in public offerings
Arif Habib Group is one of the fastest growing blue-chip conglomerates in
Pakistan with a rich history and a remarkable repute in the financial markets. The
group has a very successful track record in terms of both corporate performance
as well as raising money through capital markets. The five previous offerings of
the Arif Habib Group were oversubscribed in the range of 1.1x - 6.2x. Thus, we
believe that Fatima is likely to receive a positive response in the Book Building
process as well.

Table: History of Arif Habib's public offerings

Year of Am ount Am ount Over
(Rs mn)
Listing Offered Subscribed S ubscribed (x)
A ri f Habib Securities 2001 12.5 54.3 4.3
A ri f Habib Ltd 2007 500.0 1,346.3 2.7
A ri f Habib Bank 2008 2,514.7 7,119.9 2.8
Thatta Cement 2008 225.0 1,402.6 6.2
A ri f Habib Investment Mgmt 2008 937.5 1,008.3 1.1
S ource: JS Research

January 2010
Fatima Fertilizer Company Limited Page 7

Fatima Fertilizer – what’s on the table?

FFCL is a joint venture of FG and AHG with a nameplate capacity of 1.58mn tons G r aph: Ins talled c apac ity
diversifying in urea as well as other fertilizers (phosphatic, calcium blended and
potassium based). More than 65% of the total nameplate capacity is consumed by NPK
calcium (CAN), phosphorous (NP) and potassium (NPK) based fertilizer while the 19%
rest caters to the orthodox purely ammonia and nitrate based urea fertilizer. Thus,
Urea
this makes FFCL different from the conventional urea and DAP producers in the NP
31%
country. With the production of CAN and NP, FFCL is allowing farmers to choose 23%
substitutes of the traditional fertilizer products (CAN can be substituted for urea
CAN
while NP can be a partial replacement for DAP).
27%
Capital Structure (debt to asset ratio of 56%)
The project has an estimated cost of Rs59bn, financed by debt of Rs33bn,
So urce: Co mpany pro spectus
sponsor equity of Rs24bn and general public equity of Rs2bn which translates to
a Debt to Asset Ratio of 56%. The sponsors’ equity includes Rs4bn in convertible
preference shares, the issue of which has already been approved by the Board of
G r aph: C apital s tr uc tur e
Directors.
41%
Key products & demand outlook
Urea: Offtake to remain robust
FFCL will be adding 500k tons of urea to already installed industrial capacity of
4.6mn tons. Interestingly, while there has been hue and cry regarding excess
capacity, the total installed capacity even after the addition of Fatima and the 56% 3%
1.3mn tons by the Engro plant would only reach 6.3mn tons as against the
expected demand of 6.5mn tons in 2011. We believe, after the commissioning of Sponsors General Public Debt
Engro’s Plant, the utilization levels for major players such as FFC (120%), Engro
So urce: Co mpany pro spectus
(102%) and FFBL (105%) are likely to fall, with a probable quota determination,
thus, providing room to each of the companies to have a proportionate share in
the demand, based on their respective production capacity. We expect, FFCL’s
urea plant to operate near full capacity going forward. Further, if excess supply
exists the fertilizer can be exported at the discretion of the government. Despite
high urea prices, demand has grown by 12% to 5.6mn tons in 11M2009 and with
an annual growth of 3% in the future, we expect urea demand to reach 6.9mn
tons by 2013.

Graph: Urea demand & s upply (000 t ons )

8,000 Capacity
7,000 Offtake
6,000
5,000
4,000
3,000
2,000
1,000
-
2007A 2008A 2009E 2010F 2011F 2012F 2013F
Source: JS Research, NFDC Reports

January 2010
Fatima Fertilizer Company Limited Page 8

CAN: Cotton growth to drive demand

G r aph: CAN offtak e for ec as t
With approximately 80% of ammonium nitrate (high nitrogen content), CAN
(Calcium Ammonium Nitrate) is regarded as a close alternate for urea. It is 1000 Total prod. capacity
composed of nitrogen (27%) and calcium (8% - in calcium carbonate form). It is 800 Offtake
considered as near-neutral in its effect on the soil’s pH and therefore can be used

000 tons
600
on soils that have a low pH without affecting it further, allowing the land to
400
maintain its fertility over a long period of time. Due to its lime content, CAN is
more useful for crops that grow to a considerable height from the roots (making it 200
difficult for the lime content to affect the fruit). Hence, we opine cotton and 0

2009E

2010F

2011F

2012F
2007A

2008A
perennial fruits will be suitable crops for CAN to be used for. Currently, cotton
occupies 11% of the total cultivated land in Pakistan and we therefore consider
demand for CAN, (to some extent) can be gauged from cotton production (which So urce: JS Research, NFDC Repo rts
rose by 12% in FY10). Taking into account the increased usage of the BT cotton
seed, we project a growth of 3-4% in the crop’s yield in FY11; indicative of a
commendable CAN offtake going forward.
As there is limited knowledge about the product in the local industry we expect
FFCL to market the product effectively in order to achieve their target sales. The
management already has set an annual marketing budget in excess of Rs1bn for
this purpose and is likely to enjoy synergies through joint marketing with already
established Pak Arab Fertilizer Company (PAF), parent company of FFCL.
Looking at the historic price trend CAN has always been available at cheaper
rates than urea. Therefore, we believe the product can capture enough customers
in the local market. Keeping in mind the limiting factor of production of ammonia
being fixed at 500k tons, we expect a capacity utilization of 90% in the first year
(2010) of production and restricting it then on from 2011 to 65%, after the
commissioning of the NP plant in 2011. Currently, the CAN production stands at
450k tons (PAF, the sole producer) and additions from this new plant of FFCL’s
will add a further 420k tons to the industry’s capacity.
Nitrogen Phosphate (NP) & Nitrogen Potassium Phosphate (NPK)
The standard Nitrogen Phosphate (NP) uses 23% each of nitrogen and G r aph: NP offtak e for ec as t
phosphorous. Phosphorous is an important element for the root-growth of the
700 Total prod. capacity
crops. FFCL’s NP plant is scheduled to come online in 2011 and is expected to
add 360k tons to the existing industry’s capacity of 305k tons. Due to the Offtake
500
000 tons

presence of phosphorous in NP, it can also be used as a replacement for other

phosphate variants like DAP. Given the price differential between DAP and NP
300
and the recent resurgence in phosacid prices (used in DAP), we anticipate a shift
in the local farmers’ preferences to NP from DAP. Keeping some buffer for a
100
possible delay in the commissioning of the NP plant we have projected a capacity
2009E

2010F

2011F

2012F
2007A

2008A

availability of 85% in 2011 with a utilization level of 75%. The utilization level is
likely to reach 85% in 2012.
So urce: JS Research, NFDC Repo rts
The new technology at the plant has given FFCL an advantage to use the same
plant for the production of Nitrogen Potassium Phosphate (NPK) fertilizer as well.
NPK is another type of complex fertilizer which consumes all three key
components used to manufacture fertilizers. K in the product stands for potassium
which adds to the photosynthesis efficiency in turn improving the crop yields.
There are many types of potassium nitrates available and generally are denoted
by the weights the in the form N-P-K. Due to its limited and specialized demand,
we have not incorporated NPK’s production in our valuation. The management
has also stated that FFCL will only manufacture NPK if the pricing dynamics are
favourable.

January 2010
Fatima Fertilizer Company Limited Page 9

Profitability; 4 year CAGR (2011-15) of 20%

We project the company’s earnings to grow at a post full expansion (2011-2015)
CAGR of 20% primarily driven by the gradual production build up at the NP plant
coming online in 2011 and high margins owing to a special subsidy on feed stock.
A lower tax expense on account of an accelerated capital allowance on the heavy
capital expenditure, will contribute towards strong earnings.
Sustained healthy margins
High urea prices and a commendable offtake for CAN and NP look set to drive
G r aph: Key per for manc e mar gins
revenues to Rs24bn in 2015, a 4 year (2011-2015) CAGR of 9%. Additionally, the
company will enjoy a honeymoon period with the feedstock gas available at a 70% Gross Net EBITDA
discounted fixed rate for a period of 10 years as reported in the Fertilizer Policy. 60%
On this note, we expect FFCL to post healthy margins of 46% during this period. 50%
Revenues from the sale of Certified Emission Reduction (CER) as part of the 40%
Clean Development Mechanism (CDM) project at nitric acid plants will also 30%
contribute towards earnings until 2012 when the Kyoto Protocol expires. CDM is 20%
an arrangement under the said protocol which aims to combat global warming. 10%
0%
Deferred tax payments due to heavy Capex 2010E 2011F 2012F 2013F 2014F
A major positive for FFCL is the accelerated capital allowance on its Rs59bn
So urce: JS Research
capital expenditure which entails that despite making handsome pre tax earnings
2011 onwards, the company will enjoy zero corporate tax liability for the next 5-6
years. Section 23 of the Income Tax Ordinance 2001 allows companies to enjoy
the benefit of accelerated capital allowance in the form of an allowance on the first
time use of an asset for business purposes. Thus, FFCL will enjoy an initial
allowance of 50% on its investments in plant & machinery and buildings in the first
year of commercial operation, which in turn would defer its tax payments to future
periods. This will help the company better manage its cash flows especially in the
earlier years, when it will have to finance heavy interest and principal repayments.
Structure debt servicing for better cash management
An interesting feature in the debt agreements of FFCL is the tailored principal
repayment schedule, whereby the company enjoys accelerated principal
repayments with low payments in the early years. This enables better cash
management as reflected by the following graph.

Graph: Debt s erv ic ing v s Operat ing c as h f lows (Rs mn)

12000 Annual Markup Annual Principal Repayment

10000 Net cash from operating activities

8000

6000

4000

2000

0
2010E 2011F 2012F 2013F 2014F
Source: JS Research

January 2010
Fatima Fertilizer Company Limited Page 10

Risks to our thesis

Downside risks
ƒ Delays and cost overruns - The project is estimated to cost around
Rs59bn which is based on certain presumptions. Hence, any change in
these assumptions is likely to affect the company’s cash flow. Moreover,
any delays in commissioning of the NP plant can also add uncertainty to
the revenues of the company.
ƒ Disruption in gas supply – Gas is one of the major inputs for
manufacturing of fertilizers. Any disruptions in gas availability can hamper
the performance of the company.
ƒ Integration risks – Integration of the ammonia plant with production of
end products such as urea, CAN, NP and NPK is essential for the
company’s operations. Any issues in the process will impact the overall
production.
ƒ Lower than anticipated CAN & NP demand- CAN and NP are relatively
complex and less commonly produced/used fertilizers in Pakistan. While,
we expect relatively strong demand due to their effective pricing and yield
enhancing ability, lower than estimated demand is likely to dent earnings
and consequently the valuation.
ƒ Regulatory issues - Any changes in the regulatory framework by the
government can impact the company’s performance.
Upside risks
ƒ Kyoto Protocol - Under the Kyoto Protocol, FFCL receives benefits from
the CER until 2012. Any revision in the program beyond 2012 can boost
revenues going further.
ƒ Steep decline in interest rate - Due to its massive debt (Rs33bn), the
company can also benefit from any steep cut in the interest rates. We are
expecting an average KIBOR of 11% for 2010-11, however, a sharper
than anticipated decline in interest rates will boost the bottom line of the
company.

January 2010
Fatima Fertilizer Company Limited Page 11

About the company

Arif Habib Group along with Fatima Group incorporated Fatima Fertilizer
Company Limited on December 24, 2003 as a non-listed public company under Shar eholding patter n Pr e offer ing
the Companies Ordinance, 1984.The objective of the company is to produce and 8% 13%
sell two intermediate products, Ammonia and Nitric Acid and four final products
which are Nitro Phosphate (NP), Nitrogen Phosphorous Potassium (NPK),
Calcium Ammonium Nitrate (CAN) and Urea. The plant is fully integrated and is
located at Mukhtar Garh, Sadiqabad, Rahim Yar Khan on an area of 948 Acres of
freehold land. The Urea plant includes a 52MW captive power plant in addition to
79%
off-sites and utilities. The company has been allocated gas of 110 MMCFD from
Mari Gas fields and the gas agreement has already been executed. Directors Associated Cos.
Friends & Family
The Arif Habib Group
So urce: Co mpany pro spectus
The Arif Habib Group is regarded as one of the fastest growing blue-chip
conglomerates in Pakistan. The Group operates through Arif Habib Securities
Limited (AHSL), which is its holding company. AHSL is one of the top performing
companies listed on the Karachi Stock Exchange. On account of its good
Shar eholding patter n Pos t offer ing
corporate performance, AHSL has won the prestigious Top Companies Award in
each year since its listing at the KSE. 10% 12%
7%
The Fatima Group
The Fatima Group is one of the leading corporate groups in Pakistan with a
diversified business portfolio expanding into sugar, textile and energy sectors.
Some of the key corporations under the umbrella include Pak Arab Fertilizers 71%
Limited, Fatima Sugar Mills Limited, Reliance Weaving Mills Limited, Fazal Cloth
Directors Associated Cos.
Mills Limited, Reliance Commodities (Pvt.) Limited and Fatima Energy Limited.
Friends & Family Offering
Key personnel
So urce: Co mpany pro spectus
Mr. Arif Habib (Group Chairman)
Mr. Arif Habib is a Commerce graduate and a Fellow Member of the Institute of
Chartered Secretaries and Mangers. Along with holding key positions of a
chairman and chief executive of AHSL, he also is chairman at Arif Habib Bank
Limited, Fatima fertilizer Company Limited, Pak Arab Fertilizers Limited, Thatta
Cement Company Limited and Arif Habib DMCC Dubai. He has remained the
President/chairman of the Karachi Stock Exchange six times in the past and is
one of the founding members of the Central Depository Company of Pakistan
Limited.
Mr. Fawad Ahmad Mukhtar (CEO- Fatima Fertilizer)
Mr. Fawad Ahmad Mukhtar, a graduate from Government College Lahore, is the
Chief Executive Officer (CEO) of Fatima Fertilizer. He brings along with him rich
experience associated with the manufacturing sector, particularly the fertilizer
industry, as he is also the CEO of PAF. Besides holding these key positions in the
group companies, he is also the director of Reliance Weaving Mills Limited, Fazal
Weavings Mills Limited, Fatima Fibers Limited, Reliance Fibers Limited, Reliance
Commodities (Pvt.) Limited, Gadoon Packings (Pvt.) Limited, Farrukh Trading Co.
(Pvt.) Limited and Fatima Energy Limited company.

January 2010
Fatima Fertilizer Company Limited Page 12

Appendix I: Income statement & Balance sheet

(Rs m n) 2010E 2011F 2012F 2013F 2014F

Income Statement
Net sales 12,516 18,098 20,052 20,239 21,823
COGS 6,202 9,132 10,121 10,696 11,495
Gross profit 6,314 8,966 9,931 9,543 10,328
Operating Profit 5,100 7,587 8,456 7,977 8,664
E BITDA 7,656 10,551 11,490 11,034 11,742
Other income 99 158 386 617 786
Financial charges 5,203 5,522 5,101 4,612 3,999
P BT (4) 2,068 3,480 3,704 5,069
Tax (107) (42) 806 1,296 1,809
P AT 103 2,110 2,673 2,407 3,260

Balance Sheet
Issued, subscibed & paid -up capital 20,000 20,000 20,000 20,000 20,000
P reference shares 4,000 4,000 4,000 4,000 4,000
Unappropriated profit/(loss) (502) 1,048 3,182 5,069 7,809
S hareholder's Equity 23,498 25,048 27,182 29,069 31,809
Non current liabilities 33,003 30,026 27,036 23,746 20,073
Current Liabilities 2,664 4,014 5,009 5,827 6,874
Total Liabilities & Equity 59,165 59,088 59,227 58,642 58,755
Operating Fixed Assets 56,342 54,792 52,208 49,601 47,122
Other Assets 1,288 303 333 366 403
Total Current Assets 1,535 3,994 6,686 8,675 11,230
Total Assets 59,165 59,088 59,227 58,642 58,755

S ource: JS Research

January 2010
Fatima Fertilizer Company Limited Page 13

Appendix II: Ratio Analysis

2010E 2011F 2012F 2013F 2014F

Ratio Analysis
V aluation
E arni ng per share 0.05 1.1 1.3 1.2 1.6
B ook value per share 11.7 12.5 13.6 14.5 15.9
P ri ce to earning ratio (x) NM 9.5 7.5 8.3 6.1
P ri ce to Book value (x) 0.9 0.8 0.7 0.7 0.6
E V/EBITDA 7.1 4.8 4.0 3.6 2.8
E V per ton (US$) 403.9 369.1 323.6 278.4 225.8

P rofitability
Gross margin 50% 50% 50% 47% 47%
Gross margin exclu ding CER 47% 46% 46% 47% 47%
Operating margin 41% 42% 42% 39% 40%
Net margin 1% 12% 13% 12% 15%

S olvency
Total debt to total assets 0.6 0.6 0.6 0.6 0.6
Total debt to equi ty 1.5 1.3 1.1 0.9 0.7
Long term debt to equity 1.4 1.2 1.0 0.7 0.5
Interest cover 1.0 0.7 0.6 0.6 0.4
A ssets to equity 2.5 2.4 2.2 2.0 1.8
A ssets turnove r 0.2 0.3 0.3 0.3 0.4

Momentum
S ales growth (excluding CER) NM 46% 12% 7% 8%
E BITDA growth NM 38% 9% -4% 6%
Net profit growth NM 1940% 27% -10% 35%

S ource: JS Research

January 2010
Fatima Fertilizer Company Limited Page 14

Appendix III: Book Building Procedures

Book building is a process whereby investors bid for a specific number of shares
at various prices. The LM & BR, with the consent of the Company, sets a
reference/floor price which is the lowest price an investor can bid at. An order
book of bids from investors is maintained by the BR, which is then used to
determine the strike price. For determination of the strike price “Dutch Auction
Method” will be used.

Under the Dutch Auction Method, the strike/ price is determined by lowering the
price to the extent that the total number of shares that the Company intends to
issue through the Book Building process is subscribed. Bidders can submit their
bids at the allocated bidding centers in person or through facsimile.

A bid by a potential investor can be a “Limit Bid”, “Strike Bid” or a “Step Bid”,
which are explained below.

ƒ Limit Bid: Limit bid is at the limit price, which is the maximum price an
investor is willing to pay for a specified number of shares.

In such a case a bidder explicitly states a price at which he is willing to subscribe

to the shares. For instance, a bidder may bid for 2 million shares at PKR 15 per
share. Since the bidder has placed a limit price of PKR 15 per share, this
indicates that he is willing to subscribe at or below PKR 15 per share.

ƒ Strike Order: A bid for a specified number of shares at the strike price.

The bidders explicitly bid that they will be willing to buy say 2.0 million shares at
the strike price determined through the Book Building Process.

ƒ Step Bid: A series of limit bids at different prices.

Under this bidding strategy, bidders place a number of limit bids at different price
levels. The bidders may, for instance, make a bid for 2.0 million shares at PKR 15
per share, 1.5 million shares at PKR 16 per share and 1.0 million shares at PKR
17 per share.

Once the bid period is over and book has been built, the BR determines the strike
price.

Successful bidders will be intimated about the strike price and number of shares
allotted to them within two working days, subsequently successful institutional
bidders shall deposit remaining money within three seven working days of closing
of the bidding period.
Lead manager and book runner
Arif Habib Limited has been mandated by the Company to act as a Lead
Manager and Book Runner to this Issue, which is being made through the Book
Building Process as laid out in Appendix 4 of the Listing Regulations of the KSE.

Arif Habib Limited (“AHL”) is ranked among the premium brokerage houses in
Pakistan and its Investment Banking team is among the most active in carrying
out financial advisory services in Pakistan’ s capital markets.

January 2010
Fatima Fertilizer Company Limited Page 15

Since 2006, as part of its business expansion strategy, AHL has further
strengthened its corporate finance function to offer a fuller range of financial
services to clients. The quantum of equity and tender offerings managed by AHL
in recent years exceeds PKR 10.7 billion. During CY2007, AHL advised and
arranged one-half of all the equity offerings at the KSE. Its expertise and strong
delivery capacity act as catalysts in achieving the most value additive investment
solutions for clients. The spread of AHL’s corporate finance services includes
public and private offerings of debt and equity securities, valuation, risk
underwriting, restructurings, syndication, securitization, tender offerings and
Sharia compatible instruments.

AHL corporate finance team comprises four qualified and well-experienced

professionals with a sound project management and advisory record.
Opening and closing of the bidding period
The bidding period shall remain open for 3 working days commencing from the
business hours at 09:30 a.m. on 11 January, 2010 and will close at 05:00 p.m. on
13 January, 2010 at the close of business hours.

BIDDING PROCESS STARTS ON 11 January 2010

BIDDING PROCESS ENDS ON 13 January 2010
*(Both Days Inclusive)

Eligibility to participate in bidding

Eligible investors who can place their bids in the Book Building process are
“Institutional Investors” and “HNWI”.

ƒ Institutional Investors include both local and foreign institutional investors.

ƒ HNWI investors are individual investors who apply or bid for shares of
value of PKR 1,000,000/ or above in the Book Building process.
Mechanism for determination of strike price
One Hundred & Fifty (150) million ordinary shares, which constitute 75% of the
total issue size, would be offered to Institutional Investors and High Net worth
Individuals through the Book Building process. The remaining Fifty (50) million
ordinary shares constituting 25% of the total issue size would be offered to the
general public at or below the strike price determined through the Book Building
process. The bidding period shall last for 5 working days for receiving the bids
from potential investors. At the close of the bidding period, the strike price would
be determined by the BR in consultation with the Company.

The mechanism for determination of strike price can be understood by the

following illustration.

ƒ Quantity of shares being Offered: 150.00 million Ordinary Shares

ƒ Floor price: PKR 10 per share
ƒ Bidding Period: December 02, 2009 – December 06, 2009.

January 2010
Fatima Fertilizer Company Limited Page 16

Price (PKR Quantity Cumulative Category of

Bidders Date
per share) (mn shares) # of shares order
Institution A 16.00 25.00 25.00 Limit pri ce December 02, 2009
Institution B 14.00 37.50 37.50 Step bid December 03, 2009
Institution A 14.00 25.00 62.50 Revised bid December 04, 2009
HNWI A 13.50 43.75 106.25 Limit pri ce December 03, 2009
Institution C 12.00 43.75 150.00 Limit pri ce December 04, 2009
Institution E X 25.00 175.00 Strike order December 05, 2009
Limit pri ce
HNWI B 11.00 56.25 231.25 December 04, 2009
Withdrawn Bid
Institution B 11.00 50.00 281.25 Step bid December 05, 2009
Institution D 11.00 56.25 343.75 Limit pri ce December 06, 2009

S TRIKE PRICE DETERMINE D THROUGH TOTAL SHARES SUBSCRIBE D

DUTCH AUCTION METHOD

Setting Strike Price – On the basis of the figures provided in the above
illustration, according to the Dutch Auction Method, the strike price would be set at
PKR 12/- per share to sell the required number of 150.0 million ordinary shares.

At PKR 16 per share, investors are willing to buy only 25 million shares. Since 125
million shares are still available, therefore the price will set lower. At Rs14 per
shares, investors are willing to buy 37.50 millions shares. Since 87.50 million
shares are still available, therefore, the price will set lower. At Rs13.50 per shares,
investors are willing to buy 43.75 millions shares. Since 43.75 million shares are
still available, therefore, the price will set lower. At Rs12 per shares, investors are
willing to buy 43.75 millions shares. Since after bidding for 43.75 million shares at
Rs12 per share no shares will be available, therefore, the strike price will be set at
Rs12 per share for the entire lot of 150 million ordinary shares.

The bidders, who have submitted bids at prices above the strike price, will be
issued shares at the strike price and the differential would be refunded. Investors,
who have bid below PKR 12/- per share, do not qualify for allotment and their
money would be refunded. For allotment of shares priority will be given to
investors who placed higher bids.

In case the number of shares bid for at the Strike Price and the number of shares
bid for at Strike Order exceeds the available number of shares, then such
available shares shall be allotted to the bidders who have made bids for shares at
Strike Price and Strike Order, however, preference will be given to the bidder who
has made the bid earlier..
Basis of allotment of shares
After the closure of bidding period, the BR will analyze the demand generated at
various price levels. Only successful bidders shall be eligible for allotment of
shares. Shares to successful bidders, out of the book building portion, shall be
dispatched/credited shares at the time of the dispatch/credit of shares out of the
public portion.
Refund of margin money
Investors who have bid lower than the strike price are not eligible for allotment of
shares. Margin money of the unsuccessful bidders shall be refunded within three
(3) working days of the close of the bidding period.

January 2010
Fatima Fertilizer Company Limited Page 17

Appendix IV: Production flow diagram

Source: European Fertilizer Manufacturing Association

January 2010
Research Team
Muzzammil Aslam Economy & Politcs (92-21) 111574111 (ext. 3035) [email protected]
Farhan Rizvi, CFA Banks, Strategy & Insurance (92-21) 111574111 (ext. 3096) [email protected]
Umer Bin Ayaz E&P, Refinery & Power (92-21) 111574111 (ext. 3103) [email protected]
Syed Atif Zafar OMCs, Cement, Autos & Chemicals (92-21) 111574111 (ext. 3118) [email protected]
Mustufa Bilwani Banks, Telecom & Paper&Board (92-21) 111574111 (ext. 3100) [email protected]
Bilal Qamar Fertilizer & Textile (92-21) 111574111 (ext. 3099) [email protected]
Raheel Ashraf Technical Analyst (92-21) 111574111 (ext. 3098) [email protected]
Adeel Jafri Database Manager (92-21) 111574111 (ext. 3098) [email protected]
Rabia Mansoor Research Trainee (92-21) 111574111 (ext. 3119) [email protected]
Angela Yousuf Research Trainee (92-21) 111574111 (ext. 3097) [email protected]
Sana Hanif Research Trainee (92-21) 111574111 (ext. 3102) [email protected]
Muhammad Furqan Librarian (92-21) 111574111 (ext. 3105) [email protected]

Equity Sales
Junaid Iqbal (92-21) 32799511 [email protected]
Atif Malik (92-21) 32799513 [email protected]
Raza Abbas (92-21) 32799563 [email protected]
Faiza Naz (92-21) 32799505 [email protected]
Muzammil Mussani (92-21) 32799508 [email protected]
Sameer Danawala (92-21) 32799569 [email protected]
Asim Ali (92-21) 32799509 [email protected]
Samar Iqbal (92-21) 32800152 [email protected]
Irfan Iqbal (92-21) 32799502 [email protected]
Ahmed Abdul Rauf (92-21) 32799518 [email protected]
Abdul Aziz (92-21) 32799507 [email protected]
Irfan Ali (92-21) 32462567 [email protected]

Main Office KSE Office Lahore Office Islamabad Office

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Karachi. Pakistan Stock Exchange Road, Karachi. Pakistan Islamabad, Pakistan.
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Website: www.js.com

JS Global Capital Limited

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report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our
compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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