Fauji Fertiliser Bin Qasim Limited (FFBL) and Fauji Fertiliser Company Limited (FFC), two major players in Pakistan’s fertiliser industry, have announced plans to evaluate a potential merger to eliminate double taxation and create operational synergies.
According to Arif Habib Limited (AHL), both companies held board meetings on July 19, 2024, where they gave an in-principle approval to explore a merger scheme. Advisors will be appointed to evaluate the proposed amalgamation, with findings to be presented to the respective boards for consideration.
Currently, FFC holds a 49.9% stake in FFBL, subjecting it to double taxation on dividend income. A horizontal merger would eliminate this issue and generate significant synergies, said a local research house. The combined entity is projected to dominate the market with leading shares in urea (43%) and DAP (60%).
Presently, FFC has an annual urea capacity of 2.04 million tonnes, while FFBL’s capacities are 0.55 million tonnes of urea and 0.65 million tonnes of DAP. Post-merger, the total capacity is expected to be 2.60 million tonnes of urea and 0.65 million tonnes of DAP. FFBL has 1,291 million outstanding shares, while FFC has 1,272 million.
Using the discounted cash flow (DCF) valuation method, AHL projects a share swap ratio of 3.3 FFBL shares for every 1 FFC share, resulting in a book value of Rs121.53 per share for the merged entity. FFC would issue 196 million new shares to FFBL’s minority shareholders.
The merged company’s earnings are expected to achieve a three-year forward compound annual growth rate (CAGR) of 49%, with earnings per share (EPS) projected at Rs9.29 in 2024 and Rs11.22 in 2025. Profitability growth is anticipated due to better DAP margins, higher dividend income from subsidiaries like FFBL Power Company Limited (FPCL) and Askari Bank Limited (AKBL), and reduced finance costs amid lower short-term borrowings.
International DAP prices dropped from $592 per tonne in January 2024 to $539 per tonne in June 2024, mainly due to a reduction in phosphoric acid prices. Consequently, FFBL reduced DAP prices from Rs13,075 per bag in May 2024 to Rs11,275 per bag. At current DAP prices and phosphoric acid costs ($948 per tonne), the DAP margin stands at $289 per tonne. AHL expects FFBL’s primary DAP margin to be $306 per tonne in 2024 and $290 per tonne in 2025.
FFBL’s cash and balances rose to Rs65 billion as of March 2024 from Rs21 billion in March 2023. The company is expected to announce cash dividends of Rs4 per share in 2024 and Rs6 per share in 2025. Short-term borrowings have been significantly reduced to Rs2.7 billion in March 2024 from Rs13.4 billion in December 2023, lowering the debt-to-asset ratio to 13.26% from 43.84%. As a result, finance costs are expected to decrease.
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