• Global values APOT at JD45.4/share and recommends a Hold on the stock
Global Investment House – Kuwait – Arab Potash Company – Investment Update- Arab Potash Company (APOT) is a Jordan-based manufacturer and supplier of potash primarily for use in agriculture. The company was formed in 1956 as a pan-Arab business venture and has a 100-year concession from the government of Jordan to manufacture and market mineral products derived from the Dead Sea. The company currently has potash production of 1.9mn tons which the company plans to expand to 2.4mn tons by 1Q-2010.
The company is a great combination of core incomes through varied business with a cushion from the non-core income and associates. The value of APOT’s shares derived from the weighted average of the DCF and relative valuation methods is JD45.4 per share. The stock closed at JD47.47 on the Amman Stock Exchange at the end of trading on 8th June 2009, which implies that the weighted average value of APOT’s shares has a potential downside of 4.4% to the share’s current market price. At APOT’s current price it is trading at P/E multiple of 15.3x and 10.7x for 2009 and 2010 respectively. We therefore downgrade our recommendation to HOLD from BUY.
Financial Performance
APOT reported 2008 revenue at JD667.5mn, up by 123% as compared to previous year revenue of JD299.6mn in 2007. Potash segment contributed 91% to the total revenue amounting to JD604.9mn while the rest was added by KEMAPCO and Numeria company operations.
APOT’s potash business margins rose by 19pps to 68.5% in 2008 from 49.3% in 2007. Potash segment cost was 87% of the total cost incurred by the Company. Other business segment operated at very low margins as compared to that of Potash and their contribution to the total was not much significant.
APOT’s operating expense rose to JD22.6mn in 2008 as compared to JD19.7mn in the previous year. Operating expense remained well under control mainly because of 90% of its production being exported through closely available port facility. Operating profits would have been higher, however, during the year, the Government of Jordan raised the Royalty charged to the Company twice. This resulted in additional royalty expenses of JD53.9mn as compared to that of 2007, while the effective royalty per ton increased to JD39.9 in 2008 from JD8.3 in 2007.
APOT’s associates have been giving wonderful returns to the Company over the years. APOT has invested in the range of 20-50% in four of its associates. In 2008, APOT earned 31% return on their investment in associate amounting to JD12mn as compared to return of 26% in 2007 on an amount of JD34.7mn.
APOT reported net income of JD311.4mn in 2008 as compared to JD150.2mn, an increase of 107%. Disintegrating the year end income into quarters, 3Q-2008 was the most profitable as compared to all others in 2008. In 3Q-2008, APOT reported net income of JD128.2mn. Third quarter income was again a direct result of high average prices during the quarter and higher volumes as before that time international contract prices with Chinese, Indian and Russian markets are finalized. Quarterly net margins during 2008 continued to increase from 32% in 1Q-2008 to 56% in 3Q-2008. During 1Q-2009, APOT reported net income of JD35.1mn as compared to JD29.3mn in 1Q-2008.
APOT’s asset decreased to JD803.2mn at the end of 1Q-2009 as compared to JD873.3mn at the end of 2008. Decline in assets was because of drop in receivables and cash balances. Going forward, we expect the Company to report asset CAGR growth of 20.7% during 2008-12. Revival of customer confidence and drive towards increasing agricultural yields would drive the volume and hence would result in an increase in the bottom line figures.
Going forward in 2009 we expect APOT to report net income of JD258.5mn, drop of 17% as compared to reported profit of JD311.4mn in 2008. Decline in net income would be a direct result of lesser sales volume in first and second quarter of 2009, however we expect the revenue to revive after the international contracts are finalized before the end of second quarter of 2009.
APOT is increasing its potash capacity. The project aims at increasing the annual potash production capacity by 0.45mn tons to 2.4mtpa by 1Q-2010. APOT has further undertaken feasibility study to increase the total potash production from 2.4mtpa to around 3.0mtpa. It is expected to complete the study in the first half of 2009 and thereafter decide whether to go for the expansion or stay put.
The company signed a 30-year Build, Operate and Transfer (BOT) agreement with Jordan Phosphate Mines Company, the two main users of the Industrial Terminal, to rehabilitate, develop, and operate the current Industrial Terminal as well as establish and operate a new terminal on a B.O.T basis at an Investment of US$100mn. The investment would result in cost reduction for the Company exports and would make process easier for the Company to channel out its produce.
The company is also expected to earn through the joint venture with Jordan Petroleum Refinery Company which aims to establish a new company, which will further invest JD70mn to rehabilitate the existing jetty and construct a new jetty in a period of 3 years. Both companies will own a 50% stake in the newly established company.
