PhosAgro Is A Top Fixed Cost Fertilizers Producer

Summary

• PhosAgro is a Russian chemical company that produces and sells phosphate fertilizers, nitrogen fertilizers and phosphates.
• Phosphate fertilizer prices are up 87% and nitrogen fertilizer prices are up 53% since the beginning of 2020.
• We expect high prices for fertilizers due to the high availability of mineral fertilizers for farmers and high gas prices. PhosAgro costs 3.7 FTM EV/EBITDA and gives 14.9% dividend yield.

Bim/E+ via Getty Images

Investment Thesis

Gas prices for PhosAgro (OTC:PHOJY) are indexed at the inflation rate. Therefore, PhosAgro does not suffer from high gas prices, unlike global fertilizer producers.

75% of the cost of nitrogen-based fertilizers (urea) and 20% of the cost of phosphate-based fertilizers (DAP/MAP) depends on gas prices. This is one of the main factors for the high prices of mineral fertilizers. Another important factor is the availability of mineral fertilizers for farmers due to high prices for agricultural products.

We expect the production of mineral fertilizers in 2021 to remain at the same level as 2020, and in 2022, we expect production to grow by 5%.

We expect the company's revenue to reach 380.6 billion rubles (+49.9% YoY) in 2021 and 359.7 billion rubles (-5.5% YoY) in 2022. We expect the company's EBITDA to reach 171.0 billion rubles (+97.7% YoY) in 2021 and 136.1 billion rubles (-20.5% YoY) in 2022.

The rent coefficient of MET (mineral extraction tax) for phosphates will grow 2.5 times from 3.5x to 8.75x in 2022. It will cost PhosAgro a 4.0% decrease in EBITDA'22. The share of MET from revenue will grow from 1% (2021) to 2.5% (2022), which will not be very significant.

We believe that the company is the beneficiary of high fertilizer prices in the current situation. We expect the strongest results from PhosAgro in Q3-Q4 2021 due to the high prices for mineral fertilizers. Meanwhile, we expect DAP/MAP prices to fall to $450/t and Urea to $290/t in the long term. The main risk for the company is a more rapid drop in fertilizer prices than we expect in 2022. We believe that PhosAgro is a mid-risk idea.

About the company

PhosAgro is a Russian vertically integrated company and one of the world's leading producers of phosphate fertilizers. The volume of production of phosphate-based fertilizers is ~7.8 million tons per year and brings ~75-80% of the company's total revenue; and, the volume of production of nitrogen-based fertilizers is ~2.4 million tons per year. The company's products are bought in 102 countries around the world, and, 30-35% comes from the domestic market.

Forecast of prices for mineral fertilizers and raw materials

We include the spot price in the estimate for sulfur. We retain our previous forecast for potassium prices. 85% of the cost of ammonia depends on the spot gas price. Due to the sharp rise in gas prices, we have raised our forecast for ammonia prices.

Source: PhosAgro Financials, Invest Heroes calculations

Earlier, we set more conservative forecasts for phosphorites and expected them at the level of $85 per ton. Against the backdrop of the strong demand from the agricultural sector, we raised our forecast for phosphorites and we now expect a smooth decline from current levels ($122/t) to the historical average levels (~$92/t).

75% of the cost of urea depends on the gas price. In view of the skyrocketing gas prices, we raised our forecast for Urea prices.

The cost of phosphate-based fertilizers depends on the cost of phosphorite (63% of the total share), sulfur (17% of the total share), and ammonia (20% of the total share). Due to the upgrade of our forecast for ammonia and phosphorite prices, we raised our target price for DAP/MAP.

Source: PhosAgro Financials, Invest Heroes calculations

Financial forecast

Production and sales

We expect the production of mineral fertilizers to remain at the same level as 2020 (~10,164 thousand ton) in 2021, and in 2022, we expect production to grow by 5% to 10,673 thousand tons. Mineral fertilizer sales will remain approximately at the production level.

Source: PhosAgro Financials, Invest Heroes calculations

Revenue and cost

Due to high fertilizer prices, we expect strong financial results for 2021-2022. We expect the company's revenue to reach 380.6 billion rubles (+49.9% YoY) in 2021 and 359.7 billion rubles (-5.5% YoY) in 2022. We forecast an increase in the total cost to 238.6 billion rubles (+21.6% YoY) in 2021 and 256.6 billion rubles (+7.5%) in 2022, amid the rising raw material prices and increased product sales.

Source: PhosAgro Financials, Invest Heroes calculations

EBITDA

We expect the company's EBITDA to reach 171.0 billion rubles (+97.7% YoY) in 2021 and 136.1 billion rubles (-20.5% YoY) in 2022. Strong results will be achieved due to the high prices of mineral fertilizers.

Source: PhosAgro Financials, Invest Heroes calculations

FCF

We expect the free cash flow to be 94.5 billion rubles by the end of 2021 and 77.5 billion rubles by the end of 2022.

Source: PhosAgro Financials, Invest Heroes calculations

Dividends

We expect a dividend of 674.5 rubles by the end of 2021 (13.2% dividend yield to the current price) and 524.0 rubles by the end of 2022 (10.2% dividend yield to the current price).

Source: PhosAgro Financials, Invest Heroes calculations

Valuation

The main drivers of growth in quotes are:

• The prices of mineral fertilizers being maintained at above average historical values in the medium term
• Gas prices for PhosAgro are indexed considering the inflation rate, as a result of which the company's margins are significantly higher than competitors from other parts of the world due to low production costs

The fair value of PhosAgro is 6,411 rubles per share. The upside from the current levels is 25.0%. The status of the share is BUY.

We expect the strongest results from PhosAgro in Q3-Q4 2021 due to the high prices for mineral fertilizers. Meanwhile, we expect DAP/MAP prices to fall to $450/t and Urea to $290/t in the long term.

To smooth out the estimation and include the future decline in mineral fertilizer prices, we valued the shares based on averaging the fundamental estimate with a one-year horizon for four future quarters from Q3 2021-Q2 2022 to Q2 2022-Q1 2023.

A high dividend yield of 674.5 rubles by the end of 2021 (13.2% dividend yield to the current price) and 524.0 rubles by the end of 2022 (10.2% dividend yield to the current price) is one of the key factors to achieve the target price.

Source: Invest Heroes calculations

Source: Invest Heroes calculations

Risks

The main risk for the company is a more rapid drop in fertilizer prices than we expect in 2022.

This can happen due to:

• The rapid fall in gas prices. Most fertilizers depend on the price of ammonia, which depends on the price of gas. Decrease in the cost of ammonia will pull down the cost of mineral fertilizers.
• A significant increase in yields in the next 1-2 years, which will lead to a drop in the price of agricultural products. This will lead to the fact that Farmers will not be able to purchase mineral fertilizers at high prices.

Authors: Aleksandr Sayganov, Mark Palshin

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PHOJY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[upwardmo]

Moscow – PhosAgro (Moscow Exchange, LSE: PHOR), one of the world's leading vertically integrated phosphate-based fertilizer producers, further to its notice of 29 April 2022, hereby announces that, on 19 May 2022, it received a formal permission from the Government Commission on Control for Effectuation of Foreign Investments dated 18 May 2022 authorising PhosAgro to maintain its depositary receipts programme effective and the depositary receipts issued thereunder (ISINs: US71922G3083; US71922G4073; US71922G1004) (the "DRs") to remain in circulation (the "Permission"). The Permission is not expressed to be limited in time.

The issue of the Permission means that the provisions of Federal Law No. 114-FZ "On Amendments to Federal Law "On Joint-Stock Companies" and Certain Legislative Acts of the Russian Federation" dated 16 April 2022 requiring Russian issuers to terminate their depositary receipts programmes, which came into force on 27 April 2022, do not apply to PhosAgro.

[mendo]

is it possible to but it anywhere now ?

[jillydavid]

Based on both of your models for share price development, the shares lose value toward 2023. 5140 and 4933 rubels respectively in the 2 models (EV/EBITDA and dividend yield). The dividend is also shrinking based on those same two tables. Unless I am reading this horribly wrong, why is this a good invesment?

[Idkmuch]

@jillydavid too cheap not to work unless the world ends

[drooyrich]

in short .. their expenses are linked to inflation .. while those of their competitors to nat gas .. if they are not stupid, they will sell their products at market prices .. at much much higher prices as nat gas has increased tremendously .. ok .. I keep it (bought at 14) .. bye

[bazooooka]

interesting

[haoleboy1967]

@bazooooka hello fine gentleman

[Apple Juice]

Dear Author, despite the significant reduction in earnings that you are forecasting for Phosagro in 2022, versus H2 2021, you do not suggest selling Phosagro in Q1 2022 for example, in the hope of buying back at a cheaper price further down the line.
If this is correct, then why not? Do you believe that the stock is sufficiently undervalued today anyway? Or maybe that it would be dumb to sell this company and run the risk of not receiving the Dividend?

I would be very interested to know your opinion regarding selling Phosagro before the lower earnings come out, or why you think it is worth holding on to this company even through a down year (2022)?

Thank you very much + very interesting article!

[kiki089]

@Apple Juice Today I believe it is devalued enough... bought at $7

[Idkmuch]

@kiki089 how do you receive a dividend if they are cut off swift ?

[kiki089]

@Idkmuch Good question, my biggest concern is being stopped out as a foreign investor (GDR delisting). I dont mind not cashing the dividends as long as I am paid in shares (this solution does not involve currencies). As a second choice I would go with a massive share buy back pending the end of the war.

[BeaTriCe2014atSA]

Dear author, very well! Could you also comment on their investment plans and how these will impact future earnings. Thumbs up.

[Invest Heroes]

@BeaTriCe2014atSA We see that on russian stocks market usually makes sense the next 12M perspective. They also have investment program in process, it adds some additional capacities every year

[BeaTriCe2014atSA]

@Invest Heroes many thanks

[mil6]

It trades at 5000 RUB in Moscow, but 22$ on LSE. Can you help me on this?
If read correctly, there is a 15% witholding tax on dividends?
Otherwise, great overview of the company, I think you're very conservative in the 2022 projections.

[Default Smeller]

@mil6 : what trades in London is Global Depositary Receipts. One GDR only represents 1/3 of a share. That is why the difference.

[Invest Heroes]

@mil6 Thanks for your feedback!
We think LSE's stocks has low liquidity, so it is better to trade on MOEX.
We can't help with taxes, sorry.
We are conservative in our estimates for 2022, because even if PhosAgro will have one-off outstanding profits, the stocks usually don't price it.

[A Serious Man]

@Invest Heroes Ugh, average volume in London is 50-100K/day, almost the same as in Moscow. And it seems to me that currently the London listed GDR is trading at a discount of ~10%, possibly due to the Cold War risks.