M.M. Securities (Pvt.

) Ltd Equity
Synergy of Finance & Opportunities
INITIATING COVERAGE
May 10, 2010

FAUJI FERTILIZER COMPANY LIMITED

We initiate coverage on the Fauji Fertilizer Company with a Shahid Ali

‘Buy’ recommendation. We have estimated fair value of PKR Senior Research Analyst
131.2/share for the company by using two different valuation shahid@mmsecurities.com.pk
methods i.e. Dividend Discount Model (DDM) and Sum of +92-21-35317703 Ext. 111
parts method (SOP). In SOP valuation, FFC core operations
stand at PKR 112.2 whereas, FFBL, PMP & FCCL accounts for
Recommendation BUY
PKR 16.8, PKR 1.0 and PKR 1.1 respectively. Our key assump-
Current Price - As of 7th May'10 PKR 114.17
tions for the valuation methods are, required rate of return of
Fair Value - (DDM & SOP) PKR 131.2
15.74%, beta, 0.54, terminal growth of 4% and a risk premium
Upside Potential % 14.9%
of 6.0%. Further, FFC is currently offering attractive dividend
EPS - 2010E PKR 14.86
yield of 12.59% and trading at forward CY10E PEx & PBx of
EPS - 2011E PKR 15.99
7.69 and 5.77 respectively. PKR 14.37
DPS - 2010E
DPS - 2011E PKR 14.98
Key Highlights
Div Yield 2010E % 12.59
Div Yield 2011E % 13.12
 FFC is the largest urea manufacturing facility in the coun-
try with the designed annual capacity of 2,048 thousand P/E 2010E x 7.69
(k) tons which is 45.9% of the total installed capacity of P/E 2011E x 7.14
the country.

 FFC is the market leader in domestic urea sales which KATS Code FFC
holds approximately 38% of the total country urea sales. Bloomberg Code FFC.PA
Outstanding Shares mn 679
 FFC offers highest dividend yield of 12.59% in the fertil-
Market Capitalization PKR-mn 77,468
izer sector.
Share in KSE 100 Index % 2.95
1Yr High - Low PKR 117.9 - 86.9
 FFC is the parent company of Fauji Fertilizer Bin Qasim
Daily Avg Volume in '000 1,620
Limited (FFBL) with majority shareholding of 50.88%.
FFBL is the sole producer of Di-Ammonia Phosphate
(DAP) in the country which is a key driver of the com-
pany’s earnings.

 The decision regarding 20% curtailment in gas supply to Relative Price Performance—PKR
fertilizer sector would have minor impact on FFC as com-
FFC KSE 100 Index
pared to other peer companies.
140.0
120.0
Key risk to our valuation: 100.0
80.0

 Further curtailment in gas supply to fertilizer sector. 60.0

40.0
20.0
 Price was between major players due to excess capacity -
Apr-09

Apr-10
Feb-09

Sep-09

Feb-10
Mar-09

Jun-09
Jul-09

Dec-09

Mar-10
Aug-09

Oct-09

by the beginning of CY11.

Jan-09

May-09

Nov-09

Jan-10

Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good
faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are
subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not,
and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. MMSPL may, to the extent permissible by applicable law or regulation, use the above material,
conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their respective directors, officers, representatives, employees,
related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase
and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments de-
scribed in this publication, in securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
FAUJI FERTILIZER COMPANY LTD.
May 10, 2010

Largest Urea Manufacture in the Country Design Urea Capacity as of Dec’09

Source : NFDC & MMSPL Research
FFC is the largest urea manufacturing in the country with the de- EFL Agritech
signed annual capacity of 2,048k tons which is 45.9% of the total 22% 8%
installed capacity of the country. The fertilizer giant have urea Pak Arab
2%
price setting power due largest share in the production of the
DAWH
country. Despite the fact that Engro Fertilizer Limited (EFL) will 10%
become the largest urea manufacture in the end of CY10 after new
capacity addition, we believe FFC will retain its price setting
power due to the higher overall urea market share when combined FFBL
12% FFC
with FFBL the associated company 46%

Urea Offtake Story

During the last five years local urea sales of the company is con- Urea Offtake Story—’000 tons
Source : NFDC & MMSPL Research
tinuously improving YoY basis, excluding CY06 in which urea off-
take of the company registered minor decline of 0.31% over last
2,600
year. In CY09 company has sold higher ever urea offtake of 2,464k 2,542
2,550
tons as compared to last year’s offtake of 2,342k tons, reflecting a 2,499
2,500 2,464
YoY increase of 5.2%. The growth in the urea offtake was sup-
2,450
ported by a substantial high production growth of 18.4% from the
2,400
Mirpur Mathelo plant over the previous year. Moreover, in 2,342
2,350
1QCY10 urea sales of the company is also surged to 624k tons from 2,298
2,300
613k tons last year suggesting YoY increase of 1.8%, despite indus-
2,250
try urea sales decline to 1,413k tons from 1,540k tons in corre-
2,200
sponding period last year.
2,150

CY10E
CY06

CY07

CY08

CY09
Gas Curtailment to Fertilizer Sector

The recent decision regarding 20% curtailment in gas supply to

fertilizer industry by the Govt. will have adverse impact on the
fertilizer industry. However, we expect the impact on FFC would
be quite lower as compared to other peers mainly due to Mari gas
which provide gas network to FFC is not connected to SSGC &
SNGPL networks. Moreover, the quality of the gas provided to
FFC has low heating vale which can’t be pipelined to normal net-
Urea Market — CY09
work of SSGC & SNGPL. On the positive node, fertilizer compa- Source : NFDC & MMSPL Research
nies have increased urea prices by PKR25 to PKR75 per bag which
will be sufficient to cover the profitability. NFML
22%
EFL
Market Leader in Urea Segment 14% Others
8%
FFC is playing a vital role in fulfilling the urea demand of the
country and catering largest pie of the total urea market in CY09 DAWH
8%
company market share was 38%. Further in 1QCY10 FFC market
share further improved to 44% and sold 624k tons of urea com- FFBL
10%
pared to 613k tons in same period last year. However, we expect FFC
the market share of the company to decline by the end of the cur- 38%

rent year due to upcoming urea production from EFL and Fatima
Fertilizer Limited.

2
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
FAUJI FERTILIZER COMPANY LTD.
May 10, 2010

Urea and Gas Prices

YoY Change
Urea price and gas prices plays a vital role in the profitability of Source : Company Financials & MMSPL Research
any fertilizer company in our country urea price normally follows 40%
the gas prices trend. During the last five years urea prices have PAT Urea Price Fead stock Gas Price
30%
shown a stable increasing trend as compared to other fertilizer
products primarily due to the subsidy provided by the GoP in 20%
terms of cheaper natural gas to the fertilizer manufactures. In last
10%
five years urea prices were averagely increased by 11.5%. whereas ,
feed stock gas prices were averagely increased by 7.3%. 0%

-10%
Moving forward, We expect that the increasing trend of urea and
gas prices to continue in forthcoming years. We estimate that the

CY05

CY06

CY07

CY08

CY09
urea prices to increase at a CAGR of 9.4% while the feed stock gas
prices are expected to increase at a CAGR of 7.9% in the forthcom-
ing five years. Historic Urea Price - per bag (average)
Source : Company Financials & MMSPL Research

CY09 769
Strong Income Support by FFBL Dividend Income
CY08 686
Other income of the company is further boosting the bottom line
CY07 543
earnings of the company mainly supported by the dividend in-
come from associated companies specially FFBL. During the last CY06 523
five years other income account increased at a 5Yr CAGR of 24.57%
CY05 496
due to higher dividend from FFBL, as in CY09 FFBL has contrib-
uted 21.5% of the bottom line earnings of the company. In 1QCY10 - 200 400 600 800 1,000
FFBL contribution further increased to 39.2% of the bottom line
earnings due to higher dividend by the company in last quarter of
CY09. Going forward, we expect FFBL to will pay cash dividend of FFBL Contribution in FFC PAT
PKR 2,067 million (mn) to FFC in CY10. Furthermore, FFC Energy Source : Company Financials & MMSPL Research
Limited is also expected to contribute to other income of the com-
pany by the end of CY12 as the plant is expected to be online by 30%

the end of CY11. PMP’s contribution is also expected to increase as 25%

24%

the company is expected to post substantial earnings from CY10 19%

22%
20% 18%
onwards.
15%
12%

10%

5%

0%
CY07

CY07

CY07

CY08

CY09

3
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
FAUJI FERTILIZER COMPANY LTD.
May 10, 2010

Strategic Investments of the Company
Fauji Fertilizer Bin Qasim Limited
FFC is the parent company of FFBL with a majority
shareholding of 50.88%. FFBL is the sole producer of
Di-Ammonia Phosphate (DAP) in the country which
is a key driver of the company’s earnings. The com-
pany is also the sole producer of a high grade urea,
namely Granular Urea, giving FFBL a competitive
advantage over its peers in Pakistan. During CY09,
the company has produced 627kT of urea.
Pakistan Maroc Phosphore S.A. (PMP)
In 2004 Fauji Group decided to invest in Morocco
Phosphore project by acquiring 50% stake in the
company. The prime reason for the investment in
the company was to ensure the un-interrupted sup-
ply of Phosphoric Acid, the raw material for DAP
production, for group company FFBL FFC has in-
vested PKR 706mn (12.5% stake) in PMP.
industry due to better quality along with one of the
most cost efficient and well maintained cement
plants, consuming approximately 50% less energy as
compared to other cement operators. We expect
positive inflows in terms of dividend income from
the company by the end of FY11.
Company Profile
Fauji Fertilizer Company Limited was incorporated
as a private limited company in 1978. This was a
joint venture between Fauji Foundation and Haldor
Topsoe A/S of Denmark; the initial authorized capi-
tal of the company was PKR 813.90mn. Its present
share capital is PKR 6.78 billion (bn0. Moreover, the
company has also stakes of PKR 4.75bn, PKR 1.50bn
and PKR 705.92mn in FFBL, FCCL and PMP respec-
tively.
The major shareholding of the company belongs to
Fauji Foundation which holds 44.3%shares.

As in CY09 company has received first ever cash

dividend of PKR 70mn from PMP despite company
booked losses during the year. Moving forward, we Shareholding Pattern as of Dec’09
Source : Company Financials
expect PMP contribution will further increase in up-
coming years as the Phos acid prices has stared re-
Individuals Others
covery after huge decline in CY08. 16.1%
14.0%
Foreign Inv
Investment in Energy Sector 5.0%

In order to diversify the business, FFC has decided Insurance

to invest in power sector and has recently estab- Co.
9.93%
lished a separate wholly owned subsidiary for
power generation, namely FFC Energy Limited Banks &
(FFCEL) which will be responsible for the power NBFI Fauji
5.83% Foundation
generation business. The first project, assigned to the NIT & ICP 44.3%
company is to develop a wind power project of 49.5 4.81%
MW with an estimated investment of USD 130mn.
The project is in the initial stages and the financial
close is expected to be achieved by the end of
June’10, while commercial production from the pro-
ject is expected by the end of CY11.

Investment in Cement Sector

FFC has also acquired 12.63% stake in Fauji cement

(FCCL) in CY08 by investing PKR 1,500mn. The
company is one of the premier brand in the cement

4
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
FAUJI FERTILIZER COMPANY LTD.
May 10, 2010

Peer Comparison
CY08 CY09
FFC FFBL ENGRO DAWH FFC FFBL ENGRO DAWH
Net Sales (PKR mn) 30,593 26,821 23,317 7,429 36,163 36,725 30,172 11,040
PAT (PKR mn) 6,525 2,900 4,240 3,063 8,823 3,784 3,957 2,653
EPS (Basic PKR) 13.22 3.10 19.93 28.00 13.00 4.05 13.28 24.25
DPS (Basic PKR) 13.75 2.85 6.00 3.50 12.76 4.00 7.00 1.50
BVPS (Baisc PKR) 24.90 11.23 110.65 158.91 19.28 11.41 98.49 181.77
Average Price(PKR) 116.24 35.55 255.17 220.30 88.23 28.79 144.05 147.03
PEx 8.79 11.45 12.81 7.87 6.79 7.11 10.85 6.06
PBVx 4.67 3.17 2.31 1.39 4.58 2.52 1.46 0.81
Dividend Yield 11.8% 8.0% 2.4% 1.0% 14.5% 13.9% 4.9% 0.0%
ROE 53.1% 27.7% 18.0% 17.6% 67.4% 35.5% 13.5% 13.3%
ROA 20.4% 6.2% 5.2% 11.9% 22.9% 10.4% 3.0% 9.0%
EBITDA Margin 38.0% 31.3% 31.6% 41.6% 41.7% 23.1% 23.9% 13.4%
Earnings growth 21.7% 14.1% 34.4% -69.8% 35.2% 30.5% -6.7% -13.4%
GP margin 40.4% 30.7% 18.2% 41.9% 43.3% 26.3% 13.1% 35.9%
Net margin 21.3% 10.8% 18.2% 41.2% 24.4% 10.3% 13.1% 24.0%
Capacity Utilizaion 113.4% 121.2% 102.1% 114.0% 120.3% 113.8% 97.6% 115.2%

5
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
FAUJI FERTILIZER COMPANY LTD.
May 10, 2010

Financial Highlights
P & L Statement
PKR-mn CY09A CY10E CY11E CY12E CY13E CY14E
Sales 36,163 41,453 44,633 46,924 52,235 58,533
Cost of sales 20,515 23,872 26,180 27,910 31,400 35,495
Gross profit 15,648 17,581 18,454 19,014 20,835 23,038
Distribution costs 3,175 3,732 4,064 4,228 4,698 5,280
Other expenses 1,272 1,412 1,572 1,633 1,817 2,035
Finance cost 945 991 707 716 625 683
Other income 2,801 3,253 3,941 4,126 4,246 4,868
PBT 13,057 14,699 16,052 16,562 17,941 19,908
Tax 4,234 4,614 5,205 5,371 5,818 6,456
PAT 8,823 10,085 10,847 11,191 12,123 13,452
EPS (PKR) 13.00 14.86 15.99 16.49 17.87 19.83
DPS (PKR) 12.76 14.37 14.98 15.88 17.52 19.10

Balance Sheet
PKR-mn CY09A CY10E CY11E CY12E CY13E CY14E
Property, Plant & Equipment 13,994 15,250 16,666 17,769 18,821 19,805
Long Term Investments 7,728 8,552 10,752 10,752 10,752 7,752
Current Assets 14,917 10,004 8,800 10,797 11,080 15,593
Total Assets 38,552 35,715 38,128 41,228 42,564 45,060
Equity 13,083 13,426 14,415 15,264 15,820 16,874
Long Term Loan 4,579 2,019 1,599 1,552 1,517 1,365
Total non-current Liabilities 7,615 5,291 5,128 5,420 5,672 5,848
Current Liabilities 17,855 16,997 18,586 20,543 21,073 22,339
Total Equity & Liabilities 38,552 35,715 38,128 41,228 42,564 45,060

Key Ratios
CY09A CY10E CY11E CY12E CY13E CY14E
EPS (PKR) 13.00 14.86 15.99 16.49 17.87 19.83
DPS (PKR) 12.76 14.37 14.98 15.88 17.52 19.10
BVPS (PKR) 19.28 19.79 21.24 22.50 23.31 24.87
PEx 6.79 7.69 7.14 6.92 6.39 5.76
PBVx 4.58 5.77 5.37 5.08 4.90 4.59
Dividend Yield 14.5% 12.6% 13.1% 13.9% 15.3% 16.7%
ROE 67.4% 75.1% 75.2% 73.3% 76.6% 79.7%
ROA 22.9% 28.2% 28.4% 27.1% 28.5% 29.9%
EBITDA Margin 41.7% 40.6% 40.3% 39.7% 38.3% 37.8%
EV/EBITDA 39.7% 41.1% 38.5% 37.8% 38.8% 38.8%
Earnings growth 35.2% 14.3% 7.6% 3.2% 8.3% 11.0%
Dividend Payout 98.1% 96.7% 93.7% 96.3% 98.0% 96.3%
GP margin 43.3% 42.4% 41.3% 40.5% 39.9% 39.4%
Net margin 24.4% 24.3% 24.3% 23.8% 23.2% 23.0%

6
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
FAUJI FERTILIZER COMPANY LTD.
May 10, 2010

Quarterly Financial Projections

Quarterly P & L Statement
PKR-mn 1QCY10A 2QCY10E 3QCY10E 4QCY10E 1QCY11E 2QCY11E 3QCY11E 4QCY11E
Sales 9,499 10,607 10,527 10,820 10,670 11,079 11,318 11,567
Cost of sales 5,455 6,058 6,061 6,298 6,507 6,242 6,704 6,726
Gross profit 4,044 4,550 4,466 4,522 4,163 4,837 4,614 4,840
Distribution costs 903 940 948 941 960 998 1,041 1,064
Other expenses 319 370 358 365 373 399 407 392
Finance cost 264 253 243 248 180 173 168 186
Other income 1,262 492 777 722 1,392 299 1,012 1,237
PBT 3,821 3,479 3,694 3,689 4,041 3,566 4,010 4,435
Tax 1,092 1,128 1,198 1,196 1,310 1,156 1,300 1,438
PAT 2,729 2,351 2,496 2,493 2,731 2,409 2,709 2,997
EPS (PKR) 4.02 3.46 3.68 3.67 4.02 3.55 3.99 4.42
DPS (PKR) 4.00 3.39 3.71 3.28 3.76 3.45 4.03 3.73

7
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
FAUJI FERTILIZER COMPANY LTD.

Research Team

Amjad Nazir Chief Operating Officer & Head of Research coo@mmsecurities.com.pk +92-21-353396983
Shahid Ali Senior Research Analyst shahid@mmsecurities.com.pk Ext. 111
Muhammad Mohsin Ali Research Officer research@mmsecurities.com.pk Ext. 104

Sales Team

Corporate
Saqib Hussain Head of Sale & Portfolio Management saqib@mmsecurities.com.pk +92-21-35313911
Sania Zulfiqar Sales Coordinator sania@mmsecurities.com.pk +92-21-35313912

Retail
Salma Aamir Senior Sales Coordinator salma@mmsecurities.com.pk +92-21-35317706
Shahzada Haris Rashid Senior Sales Coordinator hairs@mmsecurities.com.pk +92-21-35388719
Muhammad Imran Alvi Senior Sales Coordinator imran@mmsecurities.com.pk +92-21-35396982
Muhammad Farhan Senior Sales Coordinator farhan@mmsecurities.com.pk +92-21-35897063

Contact us:

M.M. Securities (Pvt.) Ltd.

M. M. Tower, 3 – C,
Khayaban-e-Ittehad,
Phase – II, Extension,
Defence Housing Authority,
Karachi – 75500, Pakistan.
P.O.Box # 12414
Tel : +9221-35317703-04
Fax: +9221-35895328
http://www.mmsecurities.com.pk
E-mail: research@mmsecurities.com.pk

Group:
http://www.mmgoc.com.pk

Analysts’ Certification:

I, Shahid Ali, the author of this report, hereby certify that all of the views expressed in this research report accurately reflect my personal
views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or
indirectly related to the specific recommendation(s) or view(s) in this report.

Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good
faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are
subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not,
and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. MMSPL may, to the extent permissible by applicable law or regulation, use the above material,
conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their respective directors, officers, representatives, employees,
related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase 8
and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments de-
scribed in this publication, in securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.