Gubre Fabrikalari Market Perform

May 29, 2015
RESEARCH
Gubre Fabrikalari
Market Perform
Turkey - Equity - Fertilizer
Coverage Initiation
Safe and Sound
Razi, the Company’s subsidiary in Iran, has an integrated
structure, combined with a cost advantage, enabling the
Company to benefit from high gross and EBITDA margins. Razi’s
EBITDA margin has averaged 47.8% since 2010. Gubretas
generates at around 85% of its consolidated EBITDA from Razi.
Normalization of relations between Iran and West could further
improve profit margins as Razi could benefit from the wider
exporting countries with global prices and increasing capacity
utilization rate.
12M-Target Price TL
7.36TL
Potential Return TL
2%
Current Mcap (TLmn)
2,411
Current EV (TLmn)
2,359
Price Performance (TL)
7.50
6.30
5.10
3.90
GUBRF
04.15
02.15
12.14
10.14
08.14
1.50
07.14
2.70
BIST100
Stock Market Data
Bloomberg/Reuters:
Relative Performance:
GUBRF.TI / GUBRF.IS
1 mth
3 mth
12mth
1%
16%
68%
52 Week Range (TL):
Average Daily Vol (US$mn) 3 mth:
YTD TL Return:
3.65 / 7.69
3.4
44%
Shares Outstanding (mn):
334
Free Float (%):
24.1
Foreign Ow nership in Free Float (%):
Financials and Ratios
2013
2014
2015E
2016E
Research Analyst:
Net Sales (TLmn)
2,265
2,848
3,186
3,402
Halil Ibrahim Kahve
EBITDA (TLmn)
394
487
534
584
+90 (212) 384 1137
Net Profit (TLmn)
95
211
207
223
[email protected]
17.4%
17.1%
16.7%
17.2%
P/E (x)
25.5
11.4
11.7
10.8
EV/EBITDA (x)
6.0
4.8
4.4
4.0
EV/Sales (x)
1.04
0.83
0.74
0.69
Sales Contact:
EPS (TL)
0.28
0.63
0.62
0.67
+90 (212) 384 1155-58
DPS (TL)
0.20
0.15
0.15
0.17
[email protected]
EBITDA Margin
909
Current Mcap (US$mn)
05.14
Strong positioning in Turkey with margin improvement potential in
Iran. Gubretas enjoys strong brand recognition in the domestic
market and is currently the second largest player after Toros
Tarim, in the domestic fertilizer market with a 28% market share
in 1Q15. The Company is building two new NPK tanks with a total
production capacity of 500,000 tonnes, which we believe will
enable the Company to increase its efficiency and boost its
operating margin once fully operational. Gubretas sells around
70% of its products to the TACC through an exclusive agreement,
securing long term supply and protecting the Company’s
domestic market share. We believe its market share could
increase to 35% going forward with the main focus being on
supporting profit margins.
7.22TL
03.14
 As the sole fertilizer provider of the Turkish Agricultural
Credit Cooperatives (TACC); we like Company’s dominant
position in Turkey, which will be further enhanced by
capacity expansion, as well as higher profit margins
generated from Razi, its subsidiary in Iran, on the back of
the its integrated structure and with access to low price
natural gas.
Current Price TL
01.14
 We initiate our coverage of Gubretas with a Market
Perform recommendation and a 12 month target share
price of TL7.36, implying 2% upside potential. GUBRF
shares have yielded a 44% return in TL terms and
outperformed the BIST-100 by 48% since the beginning of
the year.
65
1
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
The Company in Brief
Gubretas, Turkey’s second largest fertilizer
company, commanded a 32% market share in 2014
and a 28% market share in 1Q15. The Company
was established in 1952 as Turkey’s first fertilizer
production and distribution entity. The Company was
listed on the BIST in 1986.
The consortium led by Gubretas purchased 95.62%
of Razi Petrochemical Co. shares from the Iranian
Privatization Organization for US$656mn and the
Company extended its operations though Razi in
2008.
Shareholders
Turkish Agricultural Credit Cooperatives (TACC)
76%,; Free Float 24%.
SUMMARY FINANCIALS
Income Statement
2013
2014
2015E
2016E
2014/2015E
Net Sales
2,265
2,848
3,186
3,402
12%
Cost Of Sales
-1,683
-2,125
-2,403
-2,553
13%
Gross Profit (Loss)
582
723
784
849
8%
Operating Expenses
-251
-305
-338
-360
11%
Operating Profit
332
418
446
489
7%
Consolidated EBITDA
394
487
534
584
10%
Net Other Income/ Expense
67
101
106
107
5%
Profit (Loss) from Subsidiaries
-16
1
1
1
5%
Net financial Income/ Expense
-97
-12
-12
-13
5%
Profit (Loss) before Tax
276
499
540
584
8%
5
-58
-108
-117
86%
Minority Interests
186
230
226
244
-2%
Net Income
95
211
207
223
-2%
Gross Profit Margin
25.7%
25.4%
24.6%
25.0%
-0.8 pp
EBIT Margin
14.6%
14.7%
14.0%
14.4%
-0.7 pp
EBITDA Margin
17.4%
17.1%
16.7%
17.2%
-0.3 pp
Net Income Margin
4.2%
7.4%
6.5%
6.6%
-0.9 pp
Balance Sheet
2013
2014
2015E
2016E
2014/2015E
Current Assets
1,754
1,911
2,071
2,289
8%
Cash and Cash Equivalents
571
471
699
828
49%
Short-Term Trade Receivables
407
433
531
567
23%
Inventories
506
717
601
638
-16%
Other Current Assets
270
291
240
256
-17%
Long Term Assets
1,293
1,360
1,446
1,460
6%
Total Assets
3,047
3,272
3,517
3,749
8%
Short Term Liabilities
1,622
1,690
1,790
1,879
6%
Short-Term Financial Loans
702
662
570
577
-14%
Short-Term Trade Payables
645
729
777
830
7%
Other Short-Term Liabilities
275
299
443
473
48%
Long Term Liabilities
299
303
288
276
-5%
Long-Term Financial Loans
180
147
124
112
-16%
Other Long-Term Liabilities
119
156
164
164
5%
Shareholders Equity
1,126
1,278
1,439
1,594
13%
T. Liabilities & S.holders Equity
3,047
3,272
3,517
3,749
8%
Taxation on Continuing Operations
Ratios
2
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
INVESTMENT THEME
We initiate our coverage of Gubretas, with a Market Perform
recommendation and a 12 month target share price of TL7.36, implying
2% upside potential. As the sole fertilizer provider of the Turkish
Agricultural Credit Cooperatives (TACC), the Company enjoys a dominant
position, which will be enhanced further through capacity expansion,
strengthening its positioning in the Turkish market, as well as higher profit
margins generated from its Iranian subsidiary Razi, on the back of the its
integrated structure with access to cut-price natural gas. GUBRF shares
have yielded a 44% return in TL terms and outperformed the BIST-100 by
48% since the beginning of the year; we now believe the positive
developments such as easing political risks in Iran have already been
priced in.
Playing for the market leader position in the domestic market
Gubretas enjoys high brand recognition in the domestic market and is
currently the second largest player in the domestic fertilizer market in
terms of market share. Tekfen Holding’s (TKFEN, OP) 99.9% subsidiary,
Toros Tarim, accounted for 42% of total production volume in Turkey,
followed by Gubretas (15% of the total) and Bagfas (11%) in 2014. In
terms of market share (including imports), despite Toros Tarim’s higher
production volumes, Gubretas captured a 32% market share in 2014 and
became the largest player in terms of market share, followed by Toros
Tarim (31%), Bagfas (7%) and Ege Gubre (4%). Gubretas has boosted its
market share from 23% to 32% during last 10 years. Although Gubretas’s
market share slipped to 28% allowing Toros Tarim to capture the position
of market leader with a 29.4% share in 1Q15, we expect Gubretas to
maintain its leadership position and increase its market share to 35%
during to horizon of our 10 year projection period.
Capacity expansion in Turkey
Gubretas has three production facilities in Yarimca (in the Marmara
region) and one in Izmir. The plants in Yarimca have an annual capacity
of 685,000 tonnes, which can be broken down into 185,000 tonnes of
TSP, 200,000 tonnes of NPK1 and 300,000 tonnes of NPK2. Meanwhile,
the liquid fertiliser plant in Izmir has an annual capacity of 20,000 tonnes.
The Company is currently building two new NPK tanks (NPK 1A, NPK1B)
with total production capacity of 500,000 tonnes (250,000 tonnes for each
tank), which are expected to enter operation in 1H15. Once the new NPK
facilities come into operation, the old NPK1 tank, with an annual
production capacity of 200,000 tonnes, will be wound down. Meanwhile,
the Company also plans to build an ammonium storage tank with a
capacity of 20,000 tonnes. We believe the capacity increase will enable
Gubretas to increase its efficiency and operating margins once it is fully
operational. Apart from that, the Company plans to build a AN/CAN
fertilizer facility with an annual production capacity of 500,000 tonnes
which is expected to enter operational by 2020. The Company is awaiting
the environmental impact assessment approval for the project. We believe
the Company will take concrete steps in the new investment once it
receives the necessary approval. Our valuation does not include the new
AN/CAN fertilizer facility, which could also increase the domestic
operating margin once it is completed.
3
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
A wide dealer network in Turkey
The Turkish Agricultural Credit Cooperatives Central Union (TACC), which
owns 76% of the shares in Gubretas, is a leading agricultural cooperative
which was founded in 1863. The TACC is an organization, which meets a
range of agricultural input needs (from fertilizer to tractors) and credit
requirements for its nearly 1.1mn members. The TACC is comprised of 16
regional unions, 1820 primary cooperatives, 19 subsidiaries and 10,000
employees. TACC procures all of the fertilizer needs of its partners from
Gubretas at the market price under an exclusive agreement. Gubretas
sells around 70% of its products to the TACC, which we deem positive as
it enables the Company to secure long term client base and protect the its
domestic market share.
A strong operating performance in Iran
Razi is the largest integrated petrochemical complex in Iran, with its
TL1,308mn revenue, TL414mn EBITDA and 31.6% EBITDA margin as of
2014, which directly procures raw materials and has access to cut-price
natural gas. All production process (from natural gas cracking to
producing the final output) are conducted at its facilities. An integrated
business model, as well as the procurement of raw materials at deeply
discounted prices, enable Razi to command higher operating and profit
margins than trading companies.
Razi currently has two DAP facilities and aims to enable one of these
facilities to be capable of NPK production. Razi targets production
flexibility, reducing its exposure to falling DAP prices. Razi has been able
to purchase sweet and sour gas at more deeply discounted prices than its
global peers. Razi’s cost advantage, which has allowed the Company to
post some very impressive gross and EBITDA margins, has been the
Company’s most prominent advantage. Razi’s EBITDA margin has
averaged 47.8% since 2010. Any developments regarding higher natural
gas prices in Iran will have a crucial bearing on operating margins.
In a separate development, Razi has paid a total of TL998mn in dividends
to Gubretas. Considering the acquisition cost of around US$330mn for a
48.8% stake, the acquisition cost has already been financed by the
dividend payment from Razi. We believe the generous dividend payments
from Razi will continue going forward.
Improvement in relations between the West and Iran could lead to higher
valuation
Gubretas generates around 46% of its consolidated revenue and 85% of
its consolidated EBITDA from Razi. Therefore the applied WACC for the
valuation of Razi is crucial in determining the overall valuation of
the Company. On the other hand, there is no benchmark for Iran given
the economic and political risks. In our DCF valuation of Razi, we applied
a WACC of 17% for our DCF of Razi, throughout our valuation horizon of
2015-2025, based on an equity risk premium of 6.5% and risk free rate of
13%. However we believe any positive political developments and
improvement in relations between Iran and the West could bring upside,
as the applied WACC could decline further in the event of any
normalization in relations.
4
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Note that an outline agreement on the future shape of Iran's nuclear
programme was reached in April 2014. The West and Iran are now aiming
to draft a comprehensive nuclear accord June 30 2015. Along with
the lower WACC, the removal or easing of the sanctions that have been
imposed against Iran would set the stage for a further improvement in
Razi’s operating performance with the Company standing to benefit from
a wider range of export markets with global fertilizer prices and an
increasing capacity utilization rate.
Strong corporate governance principles
The Company is strong in terms of corporate governance principles; its
transparency creates high credibility in our view. The management
prepares investors presentations, sharing its annual targets and available
information regularly, which we believe satisfies the investors’ needs. We
think that the strong corporate governance is crucial for investors in value
creation and in depth analysis, which Gubretas has already been
providing.
Risks
Raw material and fertilizer prices
Turkish fertilizer companies import around 95% of the raw materials they
need as Turkey lacks raw material resources such as nitrogen, potassium,
phosphorus and natural gas. Any sharp increase in raw material prices or
the failure to reflect rising costs to product prices as a result of weak
demand would pose risk to Company’s profitability.
For its Razi operations, the Iranian Government makes the decision for
natural gas prices. A hike in natural gas prices would squeeze margins,
posing a risk to our valuation. Another risk would be a disruption in the
moderation in relations between the West and Iran, where increasing
tensions could pressure the share price performance, in our view.
FX losses may hurt the bottom line
The Company had a net short FX position of TL587mn in its 1Q15
financial statements, comprised of US$103mn and €115mn. The rapid
depreciation of the TL against the US$ and € might burden the Company
with a surge in FX losses.
5
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
VALUATION
Gubretas operates in Turkey and in Iran through its subsidiary Razi, while
it operates as a trading company in the domestic market, and imports
most of its products and semi-products. The Company is also active in
Iran as an integrated player. Due to the different characteristics in these
operations, we valued domestic and Iranian operations separately.
Accordingly, we value Gubretas using a the sum-of-the-parts (SOTP)
valuation and perform discounted cash flow (DCF) analyses for the
domestic and Iranian operations.
We have not incorporated a peer comparison analysis for Gubretas in our
valuation, as local fertilizer producers differ from Gubretas in terms of their
level of integrated production. Meanwhile, most international peers are
integrated; hence, a comparison with global peers would not be
instructive.
SOTP Valuation
Valuation Summary -12M
GUBRF - Turkey Operations
Razi
Value (TRYmn)
Stake
Contribution (TRY mn)
588
100%
588
3,830
48.88%
1,872
Target Value
2,460
Current Mcap
2,411
Target Price (TL)
7.36
Current Price (TL)
7.22
Upside potential
2%
We calculate a target Mcap of TL2,460mn for Gubretas based on SOTP
valuation, corresponding to a 12-month target share price of TL7.36,
implying 2% upside potential.
6
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
DCF Valuation For Domestic Operations
We reached a target value of TL588mn for Gubretas’s operations in
Turkey based on DCF analysis. Our valuation assumes a 3% terminal
growth rate, a Beta of 1.0, an equity risk premium of 5.5% and risk free
rate of 8.75%. Under our assumptions, the implied WACC for Gubretas is
12.7% over our 2015-2025 projection period.
Gubretas - Free Cash Flow Projections for domestic operations (TL mn)
Net Sales
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
1,649
1,765
1,901
2,075
2,265
2,471
2,658
2,858
3,074
3,306
3,555
Operating Profit
69
78
87
98
109
121
133
146
160
175
192
Taxes
14
16
17
20
22
24
27
29
32
35
38
NOPLAT
55
62
70
78
87
97
106
117
128
140
154
Depreciation
18
20
23
27
31
35
40
44
49
55
62
Gross Cash Flow
73
82
93
105
118
132
146
161
177
195
216
Change in WCR
5
5
6
6
7
7
8
9
9
10
11
Capex
110
54
55
57
59
56
58
60
62
65
62
Free Cash Flow
-32
34
44
54
66
84
96
109
124
140
165
EBITDA
EBITDA Margin
87
98
111
125
140
156
172
190
209
230
254
5.3%
5.5%
5.8%
6.0%
6.2%
6.3%
6.5%
6.6%
6.8%
7.0%
7.1%
Assumptions and Results (TL mn)
Weight of equity
Cost of Equity
Beta
70%
14.3%
1.0
PV of FCF
371
PV of Terminal Value
497
Implied Firm Value
867
Risk free rate
8.75%
Net Cash
-353
Market Risk Premium
5.5%
12M Target Mcap
588
Cost of Debt after tax
9.0%
Tax rate
20.0%
WACC
12.7%
Terminal Value Growth
3.0%
Source: Gubretas & Garanti Securities
7
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
DCF Valuation For Razi
We calculated a target value of TL3,830mn (US$1,440mn) for Razi based
on DCF analysis. There is no benchmark for the WACC calculation in Iran
We assumed a 3% terminal growth rate, a Beta of 1.0, an equity risk
premium of 6.5% and risk free rate of 13%. We thus applied a WACC of
17% for our DCF of Razi throughout our valuation horizon of 2015-2025.
Gubretas - Free Cash Flow Projections for Razi (US$ mn)
Net Sales
Operating Profit
Taxes
NOPLAT
Depreciation
Gross Cash Flow
Change in WCR
Capex
Free Cash Flow
EBITDA
EBITDA Margin
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
600
144
36
108
27
135
2
30
107
621
153
38
115
28
143
2
20
124
649
164
41
123
29
151
2
20
133
678
175
44
131
29
160
2
20
142
709
187
47
140
28
169
2
20
151
740
200
50
150
28
178
2
20
160
772
213
53
160
28
187
2
20
170
806
227
57
170
27
197
2
20
180
841
242
61
182
26
208
3
20
190
877
258
64
193
25
218
3
20
201
914
274
69
206
20
226
3
20
209
171
28.5%
181
29.1%
192
29.6%
204
30.0%
216
30.4%
228
30.8%
241
31.2%
254
31.5%
268
31.9%
283
32.3%
295
32.2%
Assumptions and Results (US$ mn)
Weight of equity
70%
Cost of Equity
20%
Beta
1.0
Risk free rate
13%
Market Risk Premium
6.5%
Cost of Debt after tax
11.3%
Tax rate
25.0%
WACC
17%
Terminal Value
PV of FCF
PV of Terminal Value
Implied Firm Value
Net Cash
12M Target Mcap
750
290
1,040
165
1,440
3.0%
Source: Gubretas & Garanti Securities
In our valuation, Razi accounts for around 76% of the target value.
Therefore, the applied WACC for the valuation of Razi is crucial in
determining the overall valuation of the Company. As there is no
benchmark for the WACC calculation in Iran, we carried out a sensitivity
analysis as shown below to find an implied WACC and its impact on the
target price.
WACC Assumption for Razi
14.0%
15.0%
16.0%
Base
17%
18.0%
19.0%
20.0%
25.0%
Razi Value (TL mn)
4,781
4,413
4,102
3,830
3,608
3,409
3,233
2,602
A) GUBRF's 48.88% stake in Razi
2,337
2,157
2,005
1,872
1,764
1,666
1,581
1,272
588
588
588
588
588
588
588
588
2,925
2,745
2,593
2,460
2,351
2,254
2,168
1,860
B) GUBRF - Turkey Operations (TL mn)
A+B) Target Value (TL mn)
Target Price (TL)
8.76
8.22
7.76
7.36
7.04
6.75
6.49
5.57
Upside (Downside)
21%
14%
8%
2%
-2%
-7%
-10%
-23%
Source: Garanti Securities
8
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Peer Valuation
We did not incorporate a peer comparison analysis for Gubretas in our
valuation, as local fertilizer producers differ from Gubretas in terms of their
level of integrated production. Most international peers are integrated;
hence, a comparison with global peers would not be instructive. However,
we have included a list of peer group companies and multiples for
informative purposes, as set out in the table below.
MCap
US$mn
Company Name
Saudi Arabian Fertilizer Co
EV/EBITDA
2015E
2016E
P/E
2015E
2016E
13,349
15.2
14.5
16.1
15.6
688
5.9
5.5
7.7
6.6
9,199
8.1
7.1
12.0
9.9
742
4.9
4.3
7.3
6.3
Agrium Inc
15,050
8.5
7.6
14.1
12.2
Yara International Asa
13,836
5.8
5.9
10.1
9.9
K+S Ag-Reg
6,455
5.8
5.9
11.5
12.5
Uralkali Pjsc-Spon Gdr-Reg S
Jordan Phosphate Mines
Israel Chemicals Ltd
Fatima Fertilizer Co Ltd
9,219
7.6
7.3
10.2
9.7
Zaklady Azotowe Pulawy Sa
906
5.3
4.6
10.7
9.0
Fauji Fertilizer Company Ltd
1,758
6.5
6.3
9.5
9.3
China Bluechemical Ltd - H
2,008
4.0
3.6
10.0
9.0
Phosagro Oao - Cls
5,046
4.6
4.8
5.5
5.8
Average
6,521
6.9
6.4
10.4
9.6
GUBRF
909
4.4
4.0
11.7
10.8
Source: Bloomberg, Garanti Securities
Consensus vs. Garanti estimates
There is no significant discrepancy between our forecasts and the
Bloomberg figures for 2015 net sales, EBITDA and net profit forecasts. On
the other hand, our 2016 EBITDA and net profit forecasts exceed the
consensus expectations. The deviation could be a result of our
assumption of better demand and pricing conditions, and the associated
positive impact on margins 2016, combined with higher non-operating
gains.
Meanwhile, our target price of TL7.36 is 23% higher than the Bloomberg
consensus estimate of TL5.98. We think the deviation in calculations over
the WACC for Razi’s operations could be the main reason behind this
significant difference.
GUBRF
Bloomberg
Garanti Securities
Difference
(TLmn)
2015E
2016E
2015E
2016E
2015E
2016E
Net Sales
3,222
3,294
3,186
3,402
-1%
3%
EBITDA
537
557
534
584
-1%
5%
Net Profit
196
191
207
223
5%
17%
EBITDA Margin
16.7%
16.9%
16.7%
17.2%
0.1pp
0.2pp
Net Income Margin
6.1%
5.8%
6.5%
6.6%
0.4pp
0.8pp
Target Share Price
5.98
7.36
23%
Source: Bloomberg, Garanti Securities
9
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
THE GLOBAL FERTILIZER SECTOR
The use of fertilizers increases productivity and improves crop quality.
However, factors such as agricultural commodity prices, government
policies on agriculture and fertilizer policies, public fertilizer subsidies, the
economic outlook, energy costs (especially oil and natural gas) - which
affect the costs of producing fertilizers, transportation and marketing costs
and the weather all have an important impact on the direction of fertilizer
demand.
According to studies conducted by the International Fertilizer Industry
Association (IFA), agricultural commodity prices have an important
bearing on fertilizer use. Farmers generally buy fertilizers on credit and
repay the debt when their harvests have been sold. Therefore, the price
they expect to receive for their crop influences farmers’ decisions to use
fertilizers during the pre-planting season. Therefore, any increase in
market prices for agricultural commodities tends to drive fertilizer demand
higher.
Global Fertilizer Demand (mn Tonnes)
Nitrogen (N)
Phosphate (P2O5)
Potash (K2O)
Total
2011/12
107.9
41.6
28.2
177.6
2012/13
108.7
41.4
29.2
179.3
2013/14
111.1
41.5
30.1
182.7
Chg (%)
2.1%
0.3%
3.4%
1.9%
2014/15E
111.9
41.5
30.4
183.8
Chg (%)
0.7%
0.0%
0.8%
0.6%
2015/16E
114.0
42.2
31.2
187.4
Chg (%)
1.9%
1.8%
2.6%
2.0%
Source: IFA, Garanti Securities
According to the IFA, farmers reduced their fertilizer usage in 2014 in
response to a decline crop prices. Therefore, world fertilizer demand is
forecast to rise by only 0.6% in 2014/15 to 183.8mn tonnes.
The IFA expects demand for fertilizers to contract in North America,
Europe and Central and Western Asia, but to rebound in South Asia.
Fertilizer demand is expected to sustain its growth in Africa and Latin
America, while a more modest expansion is anticipated in East Asia and
Oceania.
The IFA expects global fertilizer demand to be dented by low agricultural
commodity prices in 2015/16, which are expected to impede a rebound in
fertilizer use. Global fertilizer demand is projected to expand by 2.0% to
187.4mn tonnes in 2015/2016. The growth rates for the three fertilizer
types are expected to be similar, at 1.9% to 114mn tonnes for (N), 1.8%
for Phosphate (P2O5), 1.8% for Potash (K2O) to 42.2mn tonnes and 2.6%
for K to 31.2mn tonnes.
10
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
THE FERTILIZER SECTOR IN TURKEY
A total of 3.54mn tonnes of fertilizer was produced in 2014, indicating a
decline of 1% YoY while total fertilizer consumption contracted by 6% YoY
to 5.47mn tonnes, mainly as a result of the dry weather during the year.
Turkey is the world's 7th largest agricultural producer, with its agricultural
sector being the country’s largest employer, representing around a quarter
of the workforce. The agricultural sector is plagued by a number of
structural problems such as farmers’ low purchasing power, the higher
cost of agricultural activities, a lack of know–how on soil-product types or
the correct use and timing for fertilizers, a reduction in the area of arable
land, which is mainly the result of sharing inherited land between
inheritors which places obstacles to the transition to intensive agriculture
(nearly two-thirds of Turkish farms are less than 5 hectares in size), and
higher fertilizer prices, which negatively impact the fertilizer sector.
Consumption of fertilizer in Turkey has been stable in terms of sales
volumes, which have fluctuated between 5.17mn tonnes and 5.81mn
tonnes since 2004. The use of fertilizer in Turkey stands at 92kg per
hectare in Turkey, lower than the world average of 116kg per hectare and
other countries such as Greece (153kg), the UK (252kg) and the USA
(120kg). Therefore, we believe fertilizer demand in Turkey has substantial
growth potential going forward if the structural problems in the agriculture
sector can be resolved.
Despite a production capacity of over 5.7mn tonnes - which is set to
increase further with new investments - the capacity utilization rate stood
at around 62% in 2014, with fertilizer demand of around 3.16mn tonnes,
up by 7.9%, which was met by imports. Turkey imports most of its fertilizer
needs from Ukraine, Russia, Romania, Lithuania and Tunisia.
Turkish Fertilizer Sector (000 tonnes)
5,814
5,263
4,000
2,800
2,242
2,177
2,934
3,007
2,086
1,000
2,078
2,377
2,661
2,478
2,000
2,710
3,000
3,548
3,400
2,878
2,961
3,113
3,133
3,158
4,000
3,192
4,129
4,766
3,167
4,968
5,000
3,577
5,148
5,472 5,500
5,340
3,661
5,175 5,199
5,367
3,750
6,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Consumption
Production
Import
Source: Gubretas, Garanti Securities
11
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Total fertilizer production in Turkey declined by 1% in 2014 to 3.54mn
tonnes, with Tekfen Holding’s (TKFEN, OP) 99.9% subsidiary, Toros
Tarim, accounting for 42% of the total production, followed by Gubretas
(15% of the total) and Bagfas (11%).
Share of fertilizer production by company
Share in 2014
Share in 1Q15
Gubretas,
13%
Gubretas,
15%
Others, 28%
Others, 38%
Ege Gubre,
4%
Toros Tarım,
33%
Toros Tarım,
42%
Bagfs, 11%
Ege Gubre,
3%
Bagfs, 12%
Source: Gubretas & Garanti Securities
In terms of market share (including imports), despite Toros Tarım’s higher
production volumes, Gubretas commanded a 32% market share, followed
by Toros Tarım (31%), Bagfas (7%) and Ege Gubre (4%) as of 2014. Four
companies captured around 74% of the market in the Turkish fertilizer
sector in 2014. The distribution of market share shifted in favour of Toros
Tarim in 1Q15, which captured a 29.4% market share and again became
the market leader, squeaking ahead of Gubretas with a 28% market
share. These two players were followed by Bagfas (6%) and Ege Gubre
(2% market share).
Market share of fertilizer companies
Share in 2014
Share in 1Q15
Gubretas,
32%
Gubretas,
28%
Others, 27%
Others, 35%
Ege Gubre,
4%
Toros Tarım,
31%
Bagfs, 7%
Source: Gubretas & Garanti Securities
Toros Tarım,
29%
Ege Gubre,
2%
Bagfs, 6%
As Turkey lacks the raw material resources necessary to produce
compound fertilizers, the Turkish fertilizer sector is highly dependent on
imported raw materials such as nitrogen, potassium and phosphorus and
natural gas. Turkish fertilizer companies import around 95% of their raw
material needs. Furthermore, as result of the high dependence on
imports, Turkish fertilizer companies are hindered by weak pricing ability
with margins sensitive to pricing and cost developments outside Turkey.
12
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
COMPANY OVERVIEW
Gubretas, Turkey’s second largest fertilizer company in terms of market
share, was established in 1953 as Turkey’s first fertilizer production and
distribution entity, commanding a 32% market share to become the
market leader in 2014. Toros Tarım regained its lost market leader
position in 1Q15 with a 29.4% share, followed by Gubretas (28% market
share).
The Company was listed on the ISE in 1986. The consortium led by
Gubretas purchased 95.62% of Razi Petrochemical Co. shares from the
Iranian Privatization Organization for US$656mn in 2008. Gubretas
controls 48.88% of Razi shares, which it fully consolidates as it has three
of the five seats on the board of Razi.
Shareholder structure
The Turkish Agricultural Credit Cooperatives (TACC), which is Gubretas’s
majority shareholder, holds 76% of the Company’s outstanding shares,
while the remaining 24% of the shares are held by minority shareholders.
Gubretas shares have been trading on the Bourse Istanbul since 1986.
Shareholder structure
Turkish
Agricultural
Credit
Cooperatives,
76.0%
Free Float,
24.1%
Source: The Company, Garanti Securities
The TACC, which was founded in 1863, meets a wide variety of
agricultural input needs (from fertilizers to tractors) and credit
requirements for its 1.1mn members. The TACC is comprised of 16
regional unions, 1,820 primary cooperatives, 19 subsidiaries and 10,000
employees.
In 1993, Gubretas shares were acquired by the TACC, which started to
hold the majority shares of the Company. 2002 was an important year for
Gubretas as a dealership protocol was signed with the TACC and the
Company became the sole fertilizer provider for the TACC.
The TACC procures all of the fertilizer needs of its partners from Gubretas
at the market price with the exclusive agreement. Gubretas sells around
70% of its products to the TACC, which we deem positive as while the
TACC secures long term supply, the Company protects its domestic
market share.
13
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Plants and productions capacities (thousand tonnes)
Gubretas has three production facilities in Yarimca (in the Marmara
region) and one in Izmir. The plants in Yarimca have an annual capacity
of 685,000 tonnes, which can be broken down into 185,000 tonnes of
TSP, 200,000 tonnes of NPK1 and 300,000 tonnes of NPK2. Meanwhile,
the liquid fertiliser plant in Izmir has an annual capacity of 25,000 tonnes.
The Company currently building two new NPK tanks (NPK 1A, NPK1B) in
Yarimca with total production capacity of 500,000 tonnes (250,000 tonnes
for each tank) are expected to be operational in 1H15. Once the new
NPK facilities become operational, the old NPK1 tank with a 200,000
annual production capacity will be deactivated. Meanwhile, building an
ammonium storage tank with a capacity of 20k tons is among the
Company’s future plan.
Plants and productions capacities (tonnes)
Factories' Total Capacity (tonnes)
2010
710,000
2011
710,000
2012
710,000
2013
710,000
2014
710,000
2015
1,010,000
2016
1,010,000
YARIMCA
TSP
NPK
Compound Fertilizer NPK.1
Compound Fertilizer NPK 2
685,000
185,000
500,000
200,000
300,000
685,000
185,000
500,000
200,000
300,000
685,000
185,000
500,000
200,000
300,000
685,000
185,000
500,000
200,000
300,000
685,000
185,000
500,000
200,000
300,000
985,000
185,000
800,000
300,000
985,000
185,000
800,000
300,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
250,000
250,000
25,000
25,000
250,000
250,000
25,000
25,000
Compound Fertilizer NPK 1A
Compound Fertilizer NPK 1B
IZMIR
Liquid &Powder Fertilizer
Source: Gubretas & Garanti Securities
With the completion of NPK investments, total compound fertilizer
capacity of the Yarimca facilities will increase to from 685,000 tonnes to
985,000 tonnes. Gubretas also has two ports located in Yarimca and in
Iskenderun (in the south of Turkey). As these ports are open to third
parties, the Company generates rental income from its port operations.
The Company has an aggregate warehousing capacity of 365,000 tonnes.
Gubretas’s operations and warehouse capacity
F: Production Facility, W: Warehouse, P: Port, R: regional Office
Source: The Company, Garanti Securities
14
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Production & Sales and market share
Gubretas increased its production volume by 3.2% YoY to 523,000 tonnes
with capacity utilization rate also improving by 2pp YoY to 76% in 2014.
Thanks to completion of NPK investments, the Company expects total
production to increase by 33% YoY to 695,000 in 2015 with 71% CUR.
Meanwhile, total sales volume increased by 5% YoY to 1,740K tonnes in
2014 with 3% YoY growth; total 1,800k tonnes sales volume is projected
for 2015.
71%
523
76%
507
74%
481
70%
529
77%
74%
77%
69%
61%
53%
51%
75%
53%
57%
300
200
510
514
58%
400
348
500
CUR (RHS %)
75%
463
506
499
600
Production
515
700
695
Production and CUR (000 Tonnes)
2015E
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
45%
2004
100
Source: The Company, Garanti Securities
Gubretas’s market share in 1Q15 stands at around 28%. The Company
has achieved to expand its market share from 23% to 32% in 2014, over
last 10 years, thanks to Company’s strategic partnership with the TACC
and distribution network which is a key factor underlying the increase in
its market share. The market share could increase up to 35% level as the
management has no concerns on the market share increase, on the other
hand the main focus is to increase profit margins.
24%
23%
800
1,800
33%
35%
32%
29%
32%
29%
28%
29%
1,651
1,538
1,448
1,120
1,391
26%
25%
1,100
27%
27%
1,354
1,238
1,204
1,400
1,371
1,700
1,532
Sales
Market Share (RHS %)
32%
2,000
1,740
Sales volume and market share (000 Tonnes)
26%
23%
2015E
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
20%
2004
500
Source: The Company, Garanti Securities
15
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Razi Petrochemical
Razi is the largest integrated petrochemical complex in Iran, established
in 1968. The Company produces ammonia, urea, sulphur, sulphuric acid,
phosphoric acid and DAP with a total annual production capacity of 3.6mn
tonnes at its 10 plants.
The consortium led by Gubretas purchased 95.62% of Razi Petrochemical
Co. shares from the Iranian Privatization Organization for US$656mn in
2008. Gubretas controls 48.88% of Razi shares, which it fully consolidates
as it has three seats out of the five on the board of Razi.
Shareholder structure of Razi
Shaghaiegh
Sazeh, 12.0%
Tabosan
Muhendislik,
10.9%
Company staff,
4.4%
Asya Gas enerji,
23.9%
Gubretas, 48.9%
Source: The Company, Garanti Securities
The Company utilizes both sweet and sour natural gas in its production
process, bringing competitive advantages. Razi directly procures raw
materials and has access to cut-price natural gas. All production
processes (from natural gas cracking to producing the final output) are
conducted at its facilities. The integrated business model as well as the
procurement of raw materials at deeply discounted prices enables Razi to
enjoy higher operating and profit margins when compared to trading
companies. Razi has paid a total of TL998mn in dividends to Gubretas.
Considering the acquisition cost of around US$330mn for a 48.8% stake,
the acquisition cost has already been financed by the dividend payment
from Razi.
Razi’s production capacity (000 Tonnes)
Plant
# of Plant
Capacity
Ammonia
3
1,336
Urea
1
594
Urea
2
450
Sulphuric Acid
2
627
Sulphur Granular
1
508
Phosphoric Acid
1
126
Total
10
Source: The Company, Garanti Securities
3,641
16
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Main assumptions & forecasts
Sales volume and revenues
Gubretas produced 523,000 tonnes of fertilizer (TSP+NPK) indicating an
increase of 3% YoY with a CUR of 76% in 2014. The TSP production
volume increased by 6% YoY to 117,700 tonnes while NPK production
volume was up by 2% YoY at 405,313 tonnes.
Domestic Fertilizer Production (Tonnes)
Production
TSP
Chg
NPK
Chg
Total TSK+NPK
Chg
CUR
TSP
NPK
CUR (TSP+NPK)
2011
2012
2013
2014
2015E
2016E
114,300
-7.0%
414,711
7.1%
529,011
3.7%
120,240
5.2%
361,293
-12.9%
481,533
-9.0%
111,000
-7.7%
396,000
9.6%
507,000
5.3%
117,700
6.0%
405,313
2.4%
523,013
3.2%
120,250
2.2%
576,000
42.1%
696,250
33.1%
120,250
0.0%
592,000
2.8%
712,250
2.3%
61.8%
82.9%
77.2%
65.0%
72.3%
70.3%
60.0%
79.2%
74.0%
63.6%
81.1%
76.4%
65.0%
72.0%
70.7%
65.0%
74.0%
72.3%
Source: The Company, Garanti Securities
In our valuation, we have assumed that the Company will increase its
production volume by 33% YoY to 696,250 tonnes on the back of the
completion of NPK investments with a 71% CUR in 2015. This is in line
with the Company guidance. Production volume is expected to increase
by 2.3% YoY to 712,250 tonnes, in 2016, with a 72% CUR.
As far as sales volumes are concerned, Gubretas’s total sales volume
increased by 5.4% YoY to 1.74mn tonnes in 2014. We expect sales
volumes to increase 3.7% YoY to 1.81mn tonnes in 2015, followed by
3.1% growth in 2016 to 1.86mn tonnes. Gubretas’s fertilizer sales price
averaged US$415/tonne in 2014 marking a decline of 5.6% YoY. We have
assumed an average fertilizer price of US$350/tonne, down by 15.7% in
2015 as result of the weakness in the commodity prices, before increasing
by 1% YoY in 2016 to US$353/tonne.
Domestic Fertilizer sales (Tonnes)
Fertilizer Sales (000 tonnes)
2011
2012
2013
2014
2015E
2016E
1,532
1,538
1,651
1,740
1,805
1,860
Chg
5.7%
0.4%
7.3%
5.4%
3.7%
3.1%
GUBRF Market Share
32.1%
28.8%
28.4%
31.8%
32.5%
33.0%
488
481
440
415
350
353
31.6%
-1.4%
-8.6%
-5.6%
-15.7%
1.0%
Av. fertilizer price Ton/US$
Chg
Source: The Company, Garanti Securities
17
Please see the last page of this report for important disclosures.
May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Razi production & sales volume
Looking at Gubretas’s operations in Iran, Razi’s production volume
increased by 4.9% YoY to 1,713,000 tonnes with a 47% CUR, while its
sales volume increased by 11.5% YoY to 1,431,000 tonnes, with its
fertiliser prices averaging at US$418/ tonne in 2015.
In line with the Company’s guidance, we assumed that production would
increase by 16.2% YoY in 2015 to reach 1.99mn tonnes with a 54.7%
CUR while sales volumes would increase by 3% YoY to1,474,000 tonnes.
We assumed an average fertilizer price of US$407/tonne in 2015.
Razi production & sales volume
2011
2012
Production (000 Tonnes)
1,999
1,552
Cnhg
10.1%
-22.4%
CUR
53.0%
44.1%
Sales (000 Tonnes)
1,632
1,309
Cnhg
9.9%
-19.8%
Av. Price Ton/US$
392
406
Cnhg
48.5%
3.5%
Source: The Company, Garanti Securities
2013
2014
2015
2016
1,632
5.2%
44.8%
1,283
-2.0%
378
-6.9%
1,713
4.9%
47.0%
1,431
11.5%
418
10.6%
1,990
16.2%
54.7%
1,474
3.0%
407
-2.6%
2,027
1.8%
55.7%
1,511
2.5%
411
1.0%
Gubretas posted consolidated revenues of TL2,848mn in FY14, marking
an increase of 26% YoY. Under our assumptions for production, sales
volume and average fertilizer prices set out above, we forecast a 12%
YoY increase in revenues in 2015 to TL3,186mn, with a further 7% growth
expected for 2016.
Gubretas recorded TL487mn of EBITDA with an EBITDA margin of 17.1%
in FY14, down by 0.3pp YoY. On the back of the lower CUR in the new
facilities along with a decline in fertilizer prices, we expect the Company to
complete 2015 with a 16.7% EBITDA margin (down 0.3pp YoY), leading
to TL534mn of EBITDA (up 10% YoY). We forecast that the Company will
register TL584mn of EBITDA, up by 9% YoY, with a 17.2% EBITDA
margin (up by 0.4pp YoY) in 2016.
18
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Appendix I - 1Q15 Financial Statements
Gubre Fabrikalari Summary Financials
(mn TL)
Change
1Q14
2Q14
3Q14
4Q14
1Q15
1Q15/1Q14
1Q15/4Q14
Net Sales
861
592
753
832
912
6%
10%
Gross Profit
170
109
161
283
206
21%
-27%
Operating Profit
89
37
90
202
136
52%
-33%
EBITDA
106
53
107
222
148
39%
-33%
Net Other Income/Expense
42
41
-13
34
-23
n.m.
n.m.
Profit (Loss) from Subsidiaries
-2
3
-2
2
-4
n.m.
n.m.
Financial Inc./ Exp. (net)
-20
1
3
3
8
n.m.
152%
Tax
-42
3
1
-20
-2
n.m.
n.m.
Net Income
19
45
31
115
33
71%
-72%
Net Cash
-149
-529
-423
-339
52
Working Capital
134
415
439
421
226
Shareholders Equity
898
874
973
1,278
1,451
Gross Margin
19.7%
18.4%
21.4%
34.0%
22.6%
2.9 pp
-11.4 pp
Operating Margin
10.4%
6.3%
11.9%
24.2%
14.9%
4.5 pp
-9.4 pp
EBITDA Margin
12.3%
8.9%
14.2%
26.6%
16.2%
3.9 pp
-10.5 pp
Net Profit Margin
2.2%
7.7%
4.1%
13.9%
3.6%
1.4 pp
-10.3 pp
Ratios
19
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May 29, 2015
Fertilizer
Gubre Fabrikalari
RESEARCH
Appendix II- Raw Material and Product Prices
Ammonia Middle East FOB
800
Sulphur Middle East FOB
Av. Ammonia Middle East Since 2010
Av. Sulphur Middle East Since 2010
250
650
400
250
320
200
05.15
01.15
09.14
05.14
01.14
09.13
05.13
05.15
01.15
09.14
05.14
01.14
09.13
05.13
01.13
09.12
05.12
01.12
09.11
Av. Urea Black Sea Since 2010
AN Black Sea FOB
Av. AS Black Sea Since 2010
300
01.13
09.12
05.12
01.12
09.11
01.11
05.11
05.11
01.11
09.10
01.10
05.15
01.15
09.14
05.14
01.14
09.13
05.13
01.13
100
09.12
200
300
05.12
400
01.12
300
09.11
500
05.11
400
01.11
600
09.10
500
05.10
600
700
01.10
800
AS Black Sea FOB
09.10
01.10
05.15
09.14
05.14
01.14
09.13
01.15
Urea Black Sea FOB
Av. DAP Tunusia Since 2010
05.10
DAP Tunusia FOB
05.13
01.13
09.12
05.12
01.12
09.11
50
05.11
200
01.11
100
09.10
350
05.10
150
01.10
500
05.10
200
Av. AN Black Sea Since 2010
05.15
01.15
09.14
05.14
01.14
09.13
05.13
01.13
09.12
05.12
01.12
09.11
05.11
01.11
09.10
05.10
05.15
01.15
09.14
05.14
01.14
09.13
05.13
01.13
09.12
05.12
01.12
09.11
05.11
01.11
80
09.10
50
05.10
160
01.10
100
01.10
240
150
Source: Gubretas & Garanti Securities
20
Please see the last page of this report for important disclosures.
RESEARCH
Disclaimer
This document and the information, opinions, estimates and recommendations expressed herein,
have been prepared by Garanti Securities Research Department, to provide its customers with
general information regarding the date of issue of the report and are subject to changes without prior
notice. All opinions and estimates included in this report constitute our judgment as of this date and
are subject to change without notice.
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Definition of Stock Ratings
OUTPERFORM (OP)
The stock's return is expected to exceed the return of the BIST100 over the next 12 months.
MARKET PERFORM (MP)
The stock's return is expected to be in line with the BIST100 over the next 12 months.
UNDERPERFORM (UP)
The stock's return is expected to fall below the return of the BIST100 over the next 12 months.