Vadim Dumesh in Riga -
While global potash prices fall and sector competition in Russia rises amid uncertainty over the future governance structure of operators Uralkali and Uralchem, phosphates fertiliser producer PhosAgro has separately emerged as a darling among analysts and customers.
"The phosphate fertiliser producers are set to become the blue chips of the agrochemicals market, the role which potash miners once held," Elena Sakhnova, an analyst at VTB Capital in Moscow, told Bloomberg.
VTB Capital expects the supply surplus in the $35bn phosphate market to narrow, reducing the premiums paid for potash producers. Phosphates and the potassium-based potash are not completely interchangeable and are both used by farmers at different growing phases and with different soil types. But where possible, the mix is swinging in favour of phosphates and demand for the fertiliser is expected to increase by 3% this year.
Bloomberg data that shows that the gap in enterprise value to Ebitda (a proxy for the size of premium investors are ready to pay for the shares) has narrowed to the lowest level since 2013 between potash and phosphate fertiliser makers.
Plenty of room to grow
Phosphate producers, spearheaded in Russia by PhosAgro, the world's third-largest phosphate nutrients producer, will run at 87% of total capacity in a decade, as compared with 78% in 2014, VTB Capital believes, due to the development of new projects not catching up with demand growth.
Meanwhile, potash producers will see demand shrink by 6-8% this year from 63mn tonnes in 2014, Uralkali estimates. With major new projects by Russia’s EuroChem and BHP Billiton looming on the market, this might drive down the capacity utilisation for potash companies to 78% in a decade from 85% in 2014, according to Sakhnova.
Against this background, PhosAgro is focusing on optimising its existing capacities via de-bottlenecking existing capabilities, Vladimir Sklyar of Renaissance Capital notes. The company foresees 4-5% output growth and plans optimisation to deliver up to 0.3mn tonnes of phosphate fertilisers this year, with capacity utilisation reaching almost 100%.
The investment bank also said that even despite substantial discounts of up to 30% provided to Russian farmers, the ruble strengthening in 2015 has reversed the situation for fertiliser producers. Fixed domestic prices now exceed export prices, which was reflected in PhosAgro's financials, posting quarter-on-quarter domestic revenue growth of 18% per tonne for phosphate and 45% per tonne for compound fertilisers in the first quarter.
"The most profitable fertiliser company in the world"
"[In the] First quarter we made RUB14.7bn in net profit, which made us the most profitable fertiliser company in the world," PhosAgro CEO and chairman Andrey Guryev said in a rare interview with bne IntelliNews on the fringes of the St Petersburg International Economic Forum (Spief).
Not only has demand for fertilisers picked up in traditional major markets like India and China, the start of the season in Russia has been surprisingly good, with the amounts of fertilisers supplied by the industry rising form the year before, Guryev said.
And despite concerns about a severe winter sabotaging crops, a record-high 140mn tonnes of grain yield is expected in 2015, meaning business for the fertiliser company can only grow, Guryev said, citing Agriculture Ministry data. Meanwhile, the recently prolonged Russian embargo on Western food imports embargo and the resulting import substitution effects are also helping local farmers, he added.
PhosAgro vs. Urakali
"The supply-demand situation on the horizon is much better in phosphates than in other fertilisers," said investor Jim Rogers, who not by chance also sits on the PhosAgro board. He also didn't hedge his bets, choosing not to invest in Uralkali, one of the largest potash producers in the world.
In a report on PhosAgro published on June 26, Renaissance Capital agrees that better-than-expected price dynamics and higher output horizon contributes to higher valuation of the company, upgrading the recommendation to Buy from Hold at a target price of $16/GDR.
RenCap specifically noted that PhosAgro stands out vis-a-vis the deteriorating investment case of competing Russian fertiliser producers. While Uralkali is cancelling 2014 dividend payments, PhosAgro took the opposite stand and increased the payout ratio from 20-40% to 30-50%, and announced first-quarter dividends for the first time.
In a note to clients on June 26, Uralsib analysts wrote that along with strong fundamentals supporting the investment case for PhosAgro, the pending delisting of Uralkali could lead to reallocation of funds that may be invested in PhosAgro stock. Uralsib earlier slammed Uralkali for promoting delisting with the presumed intent to go private without concern for equity value. The investment bank said it saw "no reason to keep a stock that does not pay dividends amidst growing corporate and operating concerns".
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