Getting listed on the Karachi stock Exchange seems to have become the flavour of the moment. After the IPOs of Amtex, Ghani Gas, Fatima Fertilizer, and Safe Mix in the short span of two and a half months, Agritech Limited (formerly known as Pak American Fertilizer Limited) has also decided to put its shares on the market.
Azgard Nine Limited (ANL), which happens to have a 100 percent stake in Agritech intends to raise Rs500 million by offering 16.6 million ordinary shares to the general public, with a green shoe option for the same number of shares.
The parent company is offloading 24 percent of its holding in Agritech to strengthen its financial statements through part repayment of its long-term and short-term debt.
The IPO is being offered at a premium of Rs20/share from its par value of Rs10/share, which seems quite justified based on the firms price/earning multiples when compared to those of its peers. The offer price of Rs30 implies a considerable discount of 32 percent to average the earning multiple of the industry.
What goes in huge favour of Agritech is its primary business of urea manufacturing - which is often considered as the most lucrative and safe business in Pakistan.
The company has an installed capacity of 352 thousand tons per annum of urea. But despite claiming to have the newest and most efficient urea plants, its operating efficiency levels have been on the lower side when compared to the industry benchmark.
That, however, is not much of a problem as urea has a captive demand in Pakistan, no matter what the cost is. The firm is also at the final stage of the completion of its $58 million BMR project, aimed to increase its urea capacity to 483 thousand tons per annum by the end of 1QCY10.
With more capacities coming in the system by the end of CY10, the country could face an over-supply situation, but that should not give any headache to Agritech. Besides enjoying the first-mover advantage, the firm will have the opportunity to export the residual given the massive price attractiveness of local manufactured urea in comparison to international prices.
Agritech also has another leaf in its branch - i.e. Single Super Phosphate (SSP) fertilizer - the capacity of which is intended to be raised by 32 thousand tons to 162 thousand tons per annum by the end of 1QCY10.
Though, this segment is not as lucrative as the urea business, it still remains a high margin business as the demand of phosphate fertilizer in Pakistan is on a rapid rise.
The companys financials look stable with most of the indicators either exceeding or meeting the industry benchmarks. Although, it is unclear whether the company would follow the general industry trend of high dividend payouts, there is enough reason to believe that this IPO might end up being heavily oversubscribed given the strong company fundamentals.
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AGRI TECH IN NUMBERS
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FY06 FY07 FY08 FY09
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EPS (Rs) 1.56 1.08 3.12 4.56
Gross margin 32% 48% 45% 35%
EBITDA margin 43% 48% 44% 36%
Operating margin 29% 40% 38% 31%
Net margin 189% 11% 22% 14%
Sales growth - 38% 49% 128%
Debt/assets 0% 48% 40% 47%
Interest coverage (x) 4.94 1.62 2.24 1.84
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Source: Agritech offering document