- MLCF is also taking interest, FFC has upper hand to take possession of Mianwali based firm
Fauji Fertiliser (FFC) has expressed its intention to acquire controlling interest in Agritech (AGL), a fertiliser plant located at Mianwali, Punjab. This marks FFC’s second announcement to expand its fertiliser footprint following the announcement to amalgamate Fauji Fertiliser Bin Qasim (FFBL) through a share swap (FFBL is an associate company in which FFC owns 49.88%). If FFC acquires AGL, it will also expand FFC’s footprint in the northern region of Pakistan.
It may also be recalled that Maple Leaf Cement Factory (MLCF) had also announced to acquire a controlling interest in AGL. It is believed that FFC is in a better position to acquire AGL, due to possible synergies being in the same business line.
AGL is a fertiliser manufacturer based in Mianwali, Punjab. It operates two production facilities — a urea plant in Mianwali with a production capacity of 433,000 tonnes and a Granulated Single Super Phosphate (GSSP) plant in Haripur, KPK, with a capacity of 81,000 tonnes. AGL is a key supplier in the northern regions of Pakistan due to the plant’s close proximity. According to the company, the majority of its fertiliser is distributed within a 150-200 km radius of its plants, providing it with a competitive advantage over its rivals.
FFC is the largest urea producer in Pakistan with a rated capacity of 2 million tonnes, almost 5x the size of AGL, and supplies 40% of the urea consumed in the country. This, coupled with the imminent amalgamation with its associate FFBL, will make it the largest fertiliser producer in Pakistan, with a cumulative Urea production capacity of 3.1 million. This will increase its market share in urea to 47%.
AGL’s acquisition will enhance FFC’s footprints in the northern region of Punjab and KPK with lower distribution cost thereby increasing its operating margins. AGL’s Urea plant is located in the north of Punjab which is close to KPK, while its GSSP plant is in Haripur, KPK.
The pricing details are yet to be finalised, pending regulatory approvals. However, it is expected that the deal will be negotiated near AGL’s book value, following a recent revaluation of its assets. As of June 2024, AGL’s net book value is estimated at PKR12.2 billion (PKR29/ share). In contrast, its EV is PKR37.2 billion (PKR88/ share), with total debt amounting to PKR26.3 billion. The EV per ton for AGL is PKR82,500, which is significantly lower than the cost of constructing a new plant, estimated at PKR238,000 (cost taken from EFERTs EnVen plant).
It is believed that FFC will finance this acquisition with its own sources given its robust balance sheet with cash and equivalents of PKR109 billion as of June 2024.
Issues facing AGL include shortage of gas as it relies on SNGPL network which curtails gas in winter season which results in a lower production. FFC can take advantage of this by having some sort of arrangement with its group company, Mari Petroleum (MARI) which can ensure long-term supply to AGL. However, FFC may have to incur additional capex on installing new pipelines with MARI.
AGL’s high leverage of 2.2x has elevated its finance cost, which substantially erodes its bottom-line. AGL will therefore benefit from the ongoing monetary easing.
FFC is a leader in the urea market with a share of 40%. AGL’s acquisition should bode well for FFC as it expands its footprints in the North regions of Pakistan, while its amalgamation of FFBL will further enhance its market share in Urea segment. The company has a competitive edge among its peers due to its separate gas sale agreement with MARI which charges PKR580/mmbtu for feedstock. This ensures uninterrupted gas supply at lowest cost in the industry as compared to gas cost for other fertilizer plants at PKR1,597/mmbtu. However, outstanding amount of PKR62 billion under GIDC pose a major threat to the company which may result in a substantial cash outlay. Nonetheless, FFC’s robust balance sheet will be able to finance the outlay without levering up.
Lately, AGL held its analyst briefing to discuss 9MCY24 results and future outlook. The key takeaways include:
During 9MCY24, the company’s recorded sales of PKR19.0 billion, up 36.7%YoY, as compared to PkR13.9 billion for the same period last year due to higher urea prices.
Operating margins of the company improved to 16% in 9MCY24, from 11% in 9MCY23. Subsequently, company reported loss declined by 24.4%YoY to PkR2.1 billion in 9MCY24 despite higher financial charges, up 18.6%YoY.
Company’s potential acquisition by FFC or MLCF is likely to be completed by December 2024 or January 2025. Company is in the implementation phase of the scheme of arrangement approved by court to restructure its overdue long-term debts and related mark-ups. As part of this process, it is issuing preference shares and privately placed term finance certificates (PPTFCs)/Sukuks.
During this year, company disbursed PKR500 million to short-term lenders on a pro-rata basis to settle the outstanding principal portion of these liabilities. The company also initiated the settlement with the short-Term lenders on bilateral basis to reduce the overall debt burden of the company.
Company’s urea sales were 194,000 tonnes, up by 0.5%YoY, despite 40%YoY higher urea production. However, phosphate sales declined by 13.9%YoY to 37,000 tonnes in 9MCY24 despite 37.2%YoY increase in production.
Industry’s urea production rose by 3.7%YoY as compared to previous year, due to continuous gas supplies to the two plants on SNGPL Network and one on SSGC Network. Moreover, industry production of phosphate fertilisers increased by 36.9% to 445,000 tonnes as compared to 325,000 tonnes in the same period last year.
As against this, industry urea/ phosphate offtakes fell by 7.5%/ 14.0%YoY to 4.5 million tons/ 0.55 million tons during 9MCY24, mainly due to deteriorating farmer economics.
Company’s cost of feed gas is presently at PKR1,597/ mmbtu, excluding taxes. The volume of gas allocation is 29 mmcfd. Company managed positive contribution margins during the year, in-line with DAP price fluctuations in the international market.
Company booked taxes losses during the year to the tune of PkR89.4 million.
Government priority to maintain food security while preserving foreign exchange reserves would ensure continuous supply of gas to the company.