Initiating Coverage – Agritech Limited Pakistan

Synergy of Finance & OpportunitiesM.M. Securities (Pvt.) Ltd

INITIATING COVERAGE

AGRITECH LIMITED

We initiate our coverage on AGL with a ‘HOLD’ recommen-dation and a fair value of PKR 27.8/share based on the Dis-counted Cash Flow model. AGL is currently offering upside potential of 13.6% from our fair value along with attractive dividend yield of 10.2% FY11E. The scrip is presently trading at forward FY11 P/Ex of 8.63 as compared to sector P/Ex of 8.04.

Key Fundamentals of AGL

AGL plant is strategically located in Punjab which con-sumes major quantity of fertilizer products of the country. Further, company also has an extensive distribution net-work of 500 dealers which reduces overall distribution cost of the company.

Company offers a balanced portfolio of Nitrogen & Phos-phate fertilizers; after adding SSP to its product mix by acquiring HPFL.

AGL is playing vital role to meet the local demand of Di Ammonia Phosphate (DAP) in the country as its import-ing major quantity of the product, in CY09 company has imported 11.76% of total imports. AGL holds DAP mar-ket share of 3.5% in 7MCY10.

AGL is likely to post PAT of PKR 986mn (EPS: PKR 2.51) in FY10 against PKR 885mn and EPS of PKR 2.26 in FY09. Furthermore, we expect company will announce final cash dividend of PKR 2.0/share for the year end June’10.

Key Financials Relative Price Performance—PKR

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.

Sep 24, 2010

Equity

Our research available on:Bloomberg

http://www.mmsecurities.com.pk

Shahid AliSenior Research Analyst

[email protected]+92-21-35317703 Ext. 106

PKR mn FY08 FY09 FY10E FY11E FY12E

Net Sales 5,701 12,497 11,468 14,061 18,607

Gross Profit 2,571 3,956 4,329 5,373 6,008

PAT 1,226 885 986 1,109 1,404

EPS - PKR 3.12 2.26 2.51 2.83 3.58

DPS - PKR 1.50 - 2.00 2.50 2.80

EBITDA Margin 52.52% 31.30% 36.87% 36.13% 29.83%

P/Ex N/A N/A 9.62 8.65 6.83

P/Bx N/A N/A 0.87 0.85 0.82

Recommendation HOLD

Current Price - As of Sep 23, 2010 PKR 24.46Fair Value - (DCF) PKR 27.78Upside Potential % 13.6%EPS - FY10E PKR 2.51 EPS - FY11E PKR 2.83 DPS - FY10E PKR 2.00 DPS - FY11E PKR 2.50 Div Yield - FY10E % 8.2%Div Yield - FY11E % 10.2%P/E - FY10E x 9.62 P/E - FY11E x 8.65

KATS Code AGL

Bloomberg Code AGL.PAOutstanding Shares mn 392.4 Market Capitalization PKR-mn 9,599 Share in KSE 100 Index % - 1Yr High - Low PKR 26.9 - 21.9Daily Avg Volume in '000 46

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Synergy of Finance & OpportunitiesM.M. Securities (Pvt.) Ltd

INITIATING COVERAGE

Valuation Methodology

We have used Discounted Cash Flow (DCF) based valuation for AGL and derived a fair value of PKR27.8/share. Our key assumptions for the valuation methods includes, required rate of return of 18.14%, beta, 0.86, risk premium of 6.0% and terminal growth of 4%. At current level we recommend ‘HOLD’ on AGL as its currently showing upside potential of 13.6% from our fair value.

Risk to Our Valuation:

Gas curtailment to fertilizer sector due to depleting reserves of natural gas in the country or substitu-tion of gas in favor of other sector.

Price war between major players due to excess capacity by the beginning of CY11.

Equity

Sep 24, 2010

Required Rate of Return 18.14%

Risk Free Rate 13.00%

Risk Premium 6.00%

Terminal Growth 4.00%

Beta 0.86

Fair Value 27.78

DCF Valuation

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International Comparison of Yields of Selected Commodities - Kg/HectareSource : Ministry of Agriculture & Cooperation and MMSPL Research

Sector Overview

Pakistan is basically known as an agricultural country in the past but now has relatively shifted towards the balanced economy with services and other commodities producing sectors. Agriculture is one of the largest income generating sector of the country which contributed 21.5 per cent to the GDP in FY10. It em-ploys more than 45 per cent of the country's total labor force and supports directly or indirectly about 62 per cent of the population for their provisions.

Many countries including Pakistan are faced with the challenge of producing more food and yarn, while there is not enough room for expansion in the cultivated area. The productivity levels of all major crops in our country are generally low as compared to the regional counties due to paucity of irrigation water. However yields of the major crops can be improve through balanced use of nitrogenous products specially urea and DAP. However in Pakistan farmers are not applying balanced mixture of Urea and DAP in last five years average urea: DAP ratio was 4.5:1 as compared to recommended level of 2:1.

On the demand side Urea and DAP offtakes has increased with a CAGR of 6.4% and 8.1% respectively in last five years, while the production of both products did not increase in line with the demand, resulting in a huge demand supply gap in the country. However, we believe that the country will be able to meet the local demand of Urea by the end CY10, owing to the expected additional production of 1.3mn tons and 0.5mn tons of Engro and Fatima Fertilizer respectively. Whereas, the deficit of DAP fertilizer will continue in forthcoming years as there is no expansion of DAP plants in pipeline.

Synergy of Finance & OpportunitiesAGRITECH LIMITED

M.M. Securities (Pvt.) Ltd Equity

Paddy/Rice

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Wheat

SugarcaneMaize

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Company Overview

Agritech Limited, formally known as Pak American Fertilizer Limited, is mainly owned by Azgard Nine Limited (79.87%). However, ANL has finally decided to offload its holding in AGL, FFC is likely to buy AGL as it has shown its interest in acquisition. AGL has a nameplate capacity of 483K tons of urea after expansion in FY10. Further, in October 2009, Agritech has acquired Hazara Phosphate Fertilizer Limited (HPFL) with an investment of PKR1.34bn, which produces Single Super Phosphate (SSP). We can consid-ered SSP as a substitute product of DAP. Moreover, AGL holds market share of 6%, 7% and 59.5% of urea, imported DAP and SSP respectively in CY09.

AGL Plant is Strategically Located AGL plant is strategically located in Punjab which consumes major quantity of fertilizer products in the country, which reduces overall distribution cost of the company. Further, company owns one of the high quality/efficiency after Fatima Fertilizer plant in the country which gives competitive advantage to AGL over other peers companies.

Extensive Distribution Network The Company has successfully developed a extensive distribution network of over 500 dealers within a short time period which indicates aggressive and professionalism of the management. Further it has re-duces overall distribution cost of the company and giving competitive advantage over its peer companies.

Urea Segment

AGL core business is to produce and sale of Urea in the country. Company owns one of the most efficient urea manufacturing facility which is operating efficiently. In current year (CY10) company has successfully upgraded its urea production capacity to 483K tons through BMR project from 352K tons earlier. The pro-ject cost was ~USD 58mn.

Urea production of the company has increased by ~2% during last four years to 377K tons in FY10 from 354K tons in FY06. However, in FY10 company production decline by 1.7% to 377K from last year mainly due to lower gas availability. Moreover, urea offtake of the company are expected to registered minor de-cline of 1.3% over last year to 373K tons owing to lower urea production in current financial year.



Sep 24, 2010

Shareholding PatternSource : Company Financials & MMSPL Research

ANL79.9%

Institutions15.9%

Individuals4.2%

5

354

371 370

383377

330

340

350

360

370

380

390

FY06

FY07

FY08

FY09

FY10

Urea Market shareDuring 7MCY10, AGL urea market share has slightly decline to 5.4% from 5.5% in same period last year owing to entrance of new fertilizer player in the market i.e. FATIMA fertilizer. Further, FFC remained leader in the urea market with 40.3%, following 20.9%, 16.0%, 8.5%, 6.1%and 2.0% respectively by NFML, EFL, FFBL, DAWH and FATIMA.



Sep 24, 2010

Urea Market Share—7MCY10Source : NFDC & MMSPL Research

Urea Production —k tonsSource : Company Financials & MMSPL Research

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1,400

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Imported Local

Price Differential b/w Imported v/s Local Urea - PKR/50Kg bag CY10

Source : NFDC & MMSPL Research

FFC40.3%

NFML20.9%

EFL16.0%

FFBL8.5%

DAWH6.1%

AGL5.4%

FATIMA2.0%

PAFL0.9%

6

DAP Imports—k tonsSource : NFDC & MMSPL Research

Trading Margins of Imported DAP- USD/ton Source : NFDC & MMSPL Research

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CY09 CY10

DAP Segment—Imported DAP

DAP is one of the prime fertilizer products which have a better soil retention capability as compared to urea and SSP. However, the demand of the product historically remain very volatile in our country due to volatility in DAP prices. The reason behind the volatility in DAP prices is the price movement in interna-tional markets which directly impacts local DAP prices. Presently, in our country we have only one pro-ducer of DAP i.e. FFBL which caters 47% of total demand while rest of the quantity is fulfilled through im-ports.

AGL is playing vital role to meet the local demand of DAP in the country as its importing major quantity of DAP, in CY09 company has imported 11.76% of total imports of DAP which is currently declined to 6.6% in 7MCY10 owing to massive decline in DAP demand due to higher DAP prices and significant lower mar-gins.

DAP Trading Margins Drastically Declined in 7MCY10 Imported DAP has been reflecting an impressive trading margin in the local markets over the last few years, ranging from 30% to 45% on an average. During 7MCY10, DAP trading margins has drastically de-cline to 24.6% as average price of imported DAP were ~USD 485/ton against local DAP prices of ~USD 604/ton primarily due to increasing trend of DAP prices in the international markets, but relatively stable price of DAP in local market.



Sep 24, 2010

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Investment in Hazara Phosphate Fertilizer Limited (HPFL)

Agritech has acquired Hazara Phosphate Fertilizer Limited (HPFL) which produces SSP, with an invest-ment of PKR1.34bn in October 2009. HPFL is one of two produce of SSP in the country with the design ca-pacity of 130 thousand tons per year (ktpa) out of total industry capacity of 215 ktpa. Moreover, HPFL is currently investing PKR 300mn for the refurbishment and up gradation project which will further increase SSP annual production capacity to 162 ktpa.

HPFL is Producing Premier Brand of SSP HPFL is producing premier brand of SSP i.e Granulated by using combination of indigenous phosphate rock from the local mines and imported rock. SSP can be considered as a substitute of DAP and is relatively undersupplied. In FY10, company has achieved highest level of SSP production in its history and produced 103K tons of SSP up by 16% over last year mainly due to higher demand of SSP during the year.

HPFL Plant is Operating SmoothlyHPFL production plant is operating smoothly, SSP production during last four year increased at 4 Yr CAGR of 2.0% to 95.2k tons in FY10 from 80k tons in FY06. Further, company caters major share 59.5% of SSP fertilizer in the country in CY09 and market share is expected to increase in upcoming years due to forthcoming expansion of 35 ktpa in SSP plant.

Better Expectation from HPFL in Future...Going forward, we expect HPFL will play a vital role in the profitability of AGL in forthcoming years as SSP is considered a substitute product of DAP and the prices of DAP are continuously increasing so farm-ers may prefers to shift SSP from DAP. However, the effectiveness of DAP is much better than SSP.

AGL FY10 Earnings Expectation….

We expect profitability of the company will significantly improve (+ 11.37% YoY) in FY10 against corre-sponding period last year mainly due to better contribution of SSP margins. We estimate that the company will announce PAT of PKR 986mn (EPS: PKR 2.51) in FY10 against PKR 885mn and EPS of PKR 2.26 in FY09. Furthermore, company is likely to announce final cash dividend of PKR 2.0/share for the year end June’10.

However, top line of the company is likely to decline by 8.2% in FY10 to PKR 11.46bn from PKR 12.49bn last year primarily due to lower offtake of imported DAP (down by 24.1% YoY) along with lower DAP prices during the year.



Sep 24, 2010

SSP Production —k tonsSource : Company Financials & MMSPL Research

8882 77

90 95

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FY07

FY08

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Financial Highlights



Sep 24, 2010

PKRmn FY09A FY10E FY11E FY12E FY13E FY14E

Net Sales 12,497 11,468 14,061 18,607 20,789 25,714 Cost of Sales 8,541 7,139 8,688 12,599 14,463 18,375 Gross Profit 3,956 4,329 5,373 6,008 6,326 7,339 Distribution Costs 243 367 536 709 1,081 1,412 Administrative Expenses 171 183 227 230 297 388 Finance Cost 2,430 2,607 3,028 3,039 2,546 2,200 Other Expenses 131 45 47 49 62 80 Other Income 124 149 172 180 216 221 PBT 1,106 1,277 1,706 2,161 2,557 3,479 Tax 220 291 597 756 895 1,218 PAT 885 986 1,109 1,404 1,662 2,261 EPS (PKR) 2.26 2.51 2.83 3.58 4.24 5.76

DPS (PKR) - 2.00 2.50 2.80 3.50 4.25

PKRmn FY09A FY10E FY11E FY12E FY13E FY14E

Property, Plant & Equipment 12,336 12,326 12,744 13,017 13,270 13,506 Long Term Investments 1,676 4,463 4,463 4,463 4,463 4,463

Current Assets 4,780 5,615 6,053 7,414 6,677 7,992 Total Assets 25,685 31,033 30,144 31,517 30,978 32,199 Equity 7,130 10,903 11,227 11,651 12,214 13,102 Redeemable capital - Secured 10,138 8,004 6,005 4,005 2,006 - Long term loan - Secured 1,794 2,808 2,358 4,092 3,825 5,158 Total non-current Liabilities 14,590 12,845 10,968 10,429 7,754 6,904 Current Liabilities 3,965 7,284 7,949 9,437 11,010 12,193 Total Equity & Liabilities 25,685 31,033 30,144 31,517 30,978 32,199

FY09A FY10E FY11E FY12E FY13E FY14E

EPS (PKR) 2.26 2.51 2.83 3.58 4.24 5.76 DPS (PKR) - 2.00 2.50 2.80 3.50 4.25 BVPS (PKR) 18.17 27.78 28.61 29.69 31.12 33.39 PEx N/A 9.62 8.65 6.83 5.78 4.24 PBVx N/A 0.87 0.85 0.82 0.79 0.73 Dividend Yield N/A 8.3% 10.2% 11.4% 14.3% 17.4%EV/EVA N/A 19.55 16.00 12.66 13.91 10.86 EV/EBITDA N/A 4.72 3.28 2.89 2.81 2.36 ROE 12.41% 9.04% 9.88% 12.05% 13.61% 17.26%ROA 3.45% 3.18% 3.68% 4.46% 5.36% 7.02%EBITDA Margin 31.30% 36.87% 36.13% 29.83% 26.26% 23.49%GP margin 31.66% 37.75% 38.21% 32.29% 30.43% 28.54%

Net margins 7.08% 8.59% 7.89% 7.55% 7.99% 8.79%

P & L Statement

Balance Sheet

Key Ratios

9

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.

Research Team

Amjad Nazir Chief Operating Officer & Head of Research [email protected] +92-21-35396983 Shahid Ali Senior Research Analyst [email protected] +92-21-35317703 Muhammad Mohsin Ali Research Analyst [email protected] +92-21-35317704

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 # 12414Tel : +9221-35317703-04Fax: +9221-35895328http://www.mmsecurities.com.pkE-mail: [email protected]

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

Sales Team

Saqib Hussain Head of Sale & Portfolio Management [email protected] +92-21-35313911

Sania Zulfiqar Sales Coordinator [email protected] +92-21-35313912Salma Aamir Sales Coordinator [email protected] +92-21-35317706Rana Saghir Ahmed Sales Coordinator [email protected] +92-21-35317705Shahzada Haris Rashid Sales Coordinator [email protected] +92-21-35388719Muhammad Imran Alvi Sales Coordinator [email protected] +92-21-35396982Muhammad Farhan Sales Coordinator [email protected] +92-21-35897063Asif Raza Rawjani Sales Coordinator [email protected] +92-21-35313913

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.



Initiating Coverage – Agritech Limited Pakistan

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