We bring investors attention towards FATIMA, as our analysis suggests that it has qualified as a Shariah Compliant stock as per Sep‐14 accounts, with formal induction in KMI‐30 likely after Dec‐14 accounts. Based on a 3QCY14 accounts, its debt‐to‐ assets ratio has dropped to 34.88% as compared to 37.89% in 2QCY14 (benchmark being 37%). It also qualifies on other Islamic screening criteria’s. This news will likely
keep the stock buoyant in our view as it will attract liquidity from a new set investor’s (Islamic funds and other Individuals). After roll forward to Dec‐15 and tweaking some of our macro estimates post DR cut, our TP for the scrip works out to PKR38.4/share, representing a decent upside potential of 18% from last closing. Hence, we upgrade our stance on the scrip to Buy.

FATIMA reported net earnings of PKR3.0bn (EPS: PKR1.45/share) in 3QCY14, depict‐ing a massive bottom line growth of 72% QoQ. Though the net revenues of the com‐pany grew by 24% QoQ due to significant volumetric growth in Urea, remarkable improvement in gross margins primarily came at the back of absence of one‐off items(salaries and store & spares), while dip in repair & maintenance which went up in 2Q
due to annual turnaround further made the way for improvement in gross margins of the company in 3Q. Moreover, 11% QoQ reduction in financial cost further propelled the net earnings by 72% QoQ during the period under review.

Normalization of one‐off expenses propelled the profitability
FATIMA reported 3QCY14 net earnings of PKR3.0bn (EPS: PKR1.45/share), depicting a strong growth of 72% QoQ. While the volumes of Urea increased by 50% QoQ, a 40% decline in the CAN off take restricted the growth in the topline of the company to 24% QoQ. Significant volumetric growth in Urea alongside dip in repair & maintenance which went up in 2Q due to annual turnaround made the way for improvement in gross margins of the company in 3Q. Moreover, reduction in some other cost heads (salaries and stores & spares) further propelled the gross profit by 47% QoQ, while gross margins clocked up to 65% in comparison to 55% reported in 2Q. Further‐more, 11% QoQ reduction in the financial costs of the company saw the company yield lucrative net margins of 29.6% in 3QCY14 (2QCY14:21.4%).

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Shariah compliance and other key triggers to keep the stock price buoyant

We bring investors attention towards FATIMA, as our analysis suggests that it has qualified as a Shariah Compliant stock as per Sep‐14 accounts, with formal induction in KMI‐30 likely after Dec‐14 accounts. Based on a 3QCY14 accounts, its debt‐to‐assets ratio has dropped to 34.88% as compared to 37.89% in 2QCY14 (benchmark being 37%). It also qualifies on other Islamic screening criteria’s. This news will likely keep the stock buoyant in our view as it will attract liquidity from a new set investor’s (Islamic funds and other Individuals).

Although, the new GIDC Act did not mention whether it is applicable on entire fertilizer industry or only on old plants, we opine that fertilizer plants incorporated under 2001 fertilizer policy (Fatima and EnVen) will remain exempted from GIDC (feedstock) as the policy immunes them from any kind of Cess, levy, tax or fee. The key trigger going forward is the Ammonia revamp, which is projected to be completed in 4QCY15 and will add 7% to its capacity, according to the management.
On a long term basis, Fatima Group is currently in negotiations with local lenders to arrange the finances for its expansion plan in USA, in which Fatima Fertilizer is likely to have an equity stake.

About the company
Fatima Fertilizer Company Limited is a joint venture of Fatima Group and Arif Habib Group. Fatima is a fully integrated fertilizer complex of Nitro Phosphate (NP), Nitrogen Potassium Phosphate (NPK), Calcium Ammonium Nitrate (CAN) and Urea plants with off sites and utilities. Fertilizer complex has a production capacity of 1.58mn tons/annum of which all plants have commenced production, while NPK is yet to start production. Gas has been allocated to this project from Mari Gas Company Limited. Fatima Fertilizer Company Limited currently has 2.1bn shares outstanding and is listed on Karachi, Lahore and Islamabad Stock Exchanges.

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