Jul 20 2008
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Safco given 'overweight' rating
The stock is currently trading at 27.9x times its 2007 earnings, and 14.8x its 2008E (estimated) earnings. The steep valuations reflects the current robust fundamentals of the sector, Safco 's better positioning and margins within the global fertiliser industry and the increased visibility in 2009E earnings.
Firm expected urea prices until 2009 are to drive earnings growth higher and presents a potential trigger to stock price, according to SICO.
" Safco is well positioned to reap the benefits of improving fertiliser market fundamentals, driven by robust grain demand, access to cheap feedstock (natural gas) and high grain prices," SICO said in the 31-page report. Safco receives natural gas feedstock from ARAMCO at a fixed price of $0.75/MMBTU as against the current global natural gas price of $11.4/MMBTU, giving it an unparalleled competitive edge over global competitors.
The analysis indicates that the company has achieved robust growth in earnings over the past four years. Safco 's revenue grew by 37 per cent CAGR and is expected to grow further by 58 per cent in 2008, driven by increasing urea prices, capacity expansion and higher utilisation rates. Globally urea prices were seeing an unprecedented rally, which led to a year to date increase of 96 per cent and the prices were expected to continue at higher levels up to 2009. Safco expanded its capacity by 76 per cent reaching 5.1 million tonnes in April 2007 and the capacity is expected to increase to 6.1 million tonnes by 2012. The report said Safco 's plans to venture into steel manufacturing will be earnings' accretive, and will provide a vehicle for long-term growth.
Safco recently announced its plans to build a 1.7 million tonnes of flat products through a 50:50 joint venture with SABIC's affiliate, HADEED . The plant is expected to be operational in the next four years.
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