Higher urea prices, margins to improve SAFCO’s performance: Aljazira Capital

Saudi Arabia Fertilizers Company’s (SAFCO) performance is expected to improve in the fiscal year 2018-2019 due to higher urea prices, higher utilization rate and margins, Aljazira Capital noted in a report.

Urea prices rose considerably during last few weeks to reach $305 per ton from an average price of $230 per ton in 2017 and $205 per ton in 2016.

The nitrogen fertilizer market is seeing improved fundamentals, the key driver for SAFCO, as urea prices will likely stabilize between $270-300 per ton over the next year, the research firm said.

The utilization rate rose to 95 percent in Q2 2018, compared to an average of 82 percent in 2017, which suggests that the new ammonia capacity is operating well after the scheduled maintenance at SAFCO 3 and SAFCO 4 facilities during FY17.

SAFCO’s sales growth on higher Urea prices is expected to expand gross margins to 50.1 percent this year from 43 percent a year earlier.

Net margin could recover at a faster pace to 39.4 percent versus 31.8 percent in 2017 by further support from its associate, Ibn Al-Baytar, despite a 30-day scheduled maintenance in Q4.

The firm is seen to post SAR 1.45 billion in net income for FY18, a 64.8 percent year-on-year (YoY) increase, supported by higher sales volume and margins, the report said.

Aljazira Capital recommended a “Neutral” rating on the stock and upgraded the target price to SAR 70 per share.

“We expect the company to pay a dividend of SAR 2.75 DPS (3.5 percent D/Y) in 2018 owing to a strong operating cash flow and no major capital expenditure in the medium term,” the report added.