9M11 earnings jumped 85% y-o-y on urea price surge. Production and sales volumes for 9M11 have arrived at 585,128 tonnes and 570,590 tonnes, which were on track with its 2011 targets of 770,000 tonnes and 800,000 tonnes respectively. Revenue for 9M11 has reached VND 6,849 bn (+ 46% YoY) on the back of the 34% urea price rise that lifted the GP margin to 41%. The periodic earning has arrived at VND 2,257bn (+ 85% YoY), beating both our and market consensus. Thus, we raised our FY11 earnings forecasts by 72% to VND 3,184 bn, mainly premised on higher ASP.
The potential of over-supply from FY2012 onwards raises concerns of price adjustment. In a recent release forecast of International Fertilizer Industry Association (IFA), the global supply of urea will expand at an average annual rate of 5% from now until FY2015, while demand will be growing at 3.2% per annum; this will lead to a potential surplus of 6.9 mn tonnes and 8.9 mn for FY12f and FY13f respectively. In addition, starting from 2012, the domestic supply will possibly fulfill the estimated demand of approx. 2mT pa with the operations of two new plants, Ninh Binh Urea Plant (560kTpa, operational by 2012) and Ca Mau Urea Plant (800kTpa, operational by late 2011). Although DPM’s market leading position will be strengthened with the agreement to distribute for Ca Mau Urea Plant products, we believe that the potential of over-supply may weaken the global price which DPM’s price is pegged to.
Input natural-gas price to lift up by 41.6% from 2012 onwards. At a recent briefing with investors and analysts, management has informed that the inputting natural-gas price will increase from USD4.59/mBTU to USD6.5/mBTU in FY12, which was already anticipated since Petro Vietnam has previously expressed its interests to raise the price of natural-gas sold to DPM. We have estimated such increment in gas price would push up material cost by approx. VND800bn to produce 800,000 tonnes urea in FY12.
Healthy business but without short-term catalysts, maintain NEUTRAL. DPM’s strong and liquid financial position is affirmed with its cash balance at the end of 9M11 of VND4,624 bn, equivalent to 51% of total assets. Short term and long-term borrowings are inconsiderable given the corporate size. However, in the absence of short-term catalysts, we maintain our NEUTRAL call at the revised target price of VND34,000, (DCF-based, WACC of 22.6%), giving 11% upside from this point. At our target price, the stock is trading at 4.5x PER12f and 4.3x PER13f