Topline Pakistan Research has published a report on Fauji Fertiliser Company (FFC), emphasising its competitive cost advantage and diversification strategy. Tuhus maintains a “BUY” recommendation for Fauji Fertiliser (FFC), with a target price of Rs 485 per share based on a Sum of the Parts (SOTP) analysis for June 2026. This target price represents a total return of 40%, including a dividend yield of 11%.
Our positive outlook for the stock is based on the following factors:
1. Cost Advantage Amid Lower Gas Prices:
FFC benefits from lower gas prices, at Rs 580 per million British thermal units (mmbtu) for its three production lines, resulting in gross margins of between 35% and 40% over the last four quarters. Management indicates that these lower gas prices are expected to persist until 2029, based on an agreement with gas supplier MARI. By contrast, a major competitor purchases gas from the Sui network at Rs 1,597 per million British thermal units (mmbtu). Feed gas costs typically account for 40% to 60% of total production expenses in the fertiliser sector.
2. Stronger Portfolio After Merger with FFBL:
The merger with FFBL has significantly strengthened FFC’s market position. As of May 2025, FFC holds 43% of the urea production market and 46% of the urea sales market in Pakistan. Additionally, FFC has a 62% market share in DAP over the past five months, covering both domestic and imported sources. Beyond fertilisers, FFC has significant stakes in several other ventures, including 64% of Askari Bank, 82% of Fauji Foods, 75% of FFBL Power, and 37% of PMP.
3. Investment in Gas Supply Network:
To address the depletion of gas reserves, fertiliser companies, including FFC, have invested US$300 million in the MARI field to ensure a consistent gas supply in the future. This investment will help maintain higher production levels.
4. Strong Balance Sheet to Unlock Investment Opportunities:
As of March 2025, FFC has a robust cash position of Rs 147 billion, representing 27% of its market capitalisation. The company has recently expressed interest in acquiring the national airline PIA through the ongoing privatisation round. Additionally, FFC and its affiliated companies have explored various ventures, including opportunities in the steel and cement industries.
5. Earnings Growth Projections:
FFC is expected to achieve earnings growth in the range of 20-30% from 2025 to 2027. We forecast unconsolidated earnings per share (EPS) of Rs 55, Rs 59, and Rs 60 for the years 2025, 2026, and 2027, respectively, and consolidated EPS of Rs 67, Rs 70, and Rs 72 during the same period.
6. Attractive Valuation and Dividend Payout:
We anticipate that FFC will declare dividends of Rs 41, Rs 44, and Rs 45 for the years 2025, 2026, and 2027, respectively, assuming a payout ratio of 70-75% based on unconsolidated earnings. Currently, the stock is trading at a 28% discount to its SOTP value. The expected dividend yield at the current price is 11%, which is nearly in line with the T-bills rate of 11.2%.
7. Key Risks: Important risks to our analysis and valuation include (1) an unexpected increase in gas prices before 2029, outside of inflation-related adjustments, (2) lower-than-anticipated urea sales, (3) extended price discounts on urea, and (4) reduced farm income.
