OT: Americas: Agriculture: Raising estimates and price targets on continued fertilizer strength
Goldman Sachs Note December 27, 2007 Canada
Rising fertilizer prices
1) Fertilizer producers will maintain their pricing momentum into 2008 as they continue to flex their pricing muscle and take advantage of a very tight market. Potash producers recently announced a $88/mt price increase for March 1, 2008, following increases for October 2007, December 2007 and January 2008. Concurrent price increases have been announced in the offshore markets in Brazil and Southeast Asia.
2) The domestic phosphate market is totally sold out with current DAP inventories 39% below the past 5-year average. Export DAP prices are keeping pace with domestic prices ($588/mt for exports vs. $550/mt in Central Florida), up nearly 130% from last year's levels of $252/mt for exports and $240/mt in Central Florida). Rising phosphate rock and sulfuric acid costs should support these high prices throughout 2008.
3) Both ammonia and urea prices continue to move higher globally due to stronger demand and supply constraints. India just finished a new 150 kmt urea tender for $419-$445/mt CFR; however, an additional 350 kmt is needed by the end of January for which they will have to pay more for.
Raising EPS estimates and price targets
With significantly higher fertilizer prices, we are once again making large earnings revisions. Rolling forward our valuation metrics to 2009, we raise our 12-month price targets for POT to $180 from $122 (14X 2009E EV/EBITDA), for MOS to $120 from $65 (11.5X CY2009E EV/EBITDA) and for AGU to $80 from $58 (8.5X 2009E EV/EBITDA). We are also raising 2008E EPS by 15-45% and 2009E by 30-80%. With solid fundamentals, we today upgraded POT to Buy based on unprecedented pricing power. With limited potash and phosphate capacity additions, strong demand, and more scope for earnings revisions on rising prices, the risk/reward is still compelling.
Catalyst
Besides earnings, the next major catalyst will be the completion of the ongoing potash Chinese contract. With prices in China nearly $250/mt lower than ongoing global spot prices of $500/mt, we expect China to pay at least $100-$125/mt higher in 2008 and given the tight market, we anticipate the increase to go up the longer the negotiations last.
Risks
Weather and lower crop prices that could result in lower fertilizer demand. |
