Impacts of DPM Failure to Buy Ca Mau Fertilizer: Pro

Analyst with Vfpress has quick research on the impacts of the failure:

1.     Deal Development

The deal between PetroVietnam Fertilizer and Chemical JSC (DPM) and PetroVietnam Ca Mau Fertilizer Company Limited (PVCFC) has been talked about since 2008. In 2009, DPM’s annual general meeting (AGM) did not approve the plan to buy PVCFC due to big size of investment, unclear efficiency and economic crisis. Many DPM’s major shareholders (not only PVN) feared that the project might not come life until 2015.

Many DPM’s shareholders were happy when the proposal was not passed. Soon after DPM’s AGM, PetrolVietnam confirmed that PVCFC had total investment of $900 million with capacity of 800,000 tons of urea/year and the plant will come into operation in January 2012 with payback period (time required for the return on an investment) was 10.5 years.

After 3 years, PVN completed the PVCFC project as planned and DPM wanted to buy it.

2.     DPM’ AGM Oks buying PVCFC

PVCFC’s system has inherited many experiences from DPM and the plant has been operating effectively since the inception. DPM’s shareholders approved to buy PVCFC as the plant goes into life as planned and operate well.

PVCFC, with its capacity of 800,000 tons of urea/year, was a big player in the market since birth.

If DPM can buy PVCFC, total capacity of the two plants will be 1.6 trillion tons urea/year, accounting 80-84% of urea market share (total demand estimated at 2 million tons/year), a dreamed number for both producer and retailer.

Vietnam’s urea market is expected to face supply shortage until 2013 and will become competitive in 2015. However, if a company can control 80% market shares, DPM will not need to fear any competitor.

DPM’s AGM quickly passed the deal proposal and buying 51% stake in PVCFC will cost only VND2.5 trillion, much less than DPM’s cash preparation of VND5.8 trillion by end of H1/2012.

Of the two options: (1): Buying 51% stake in PVCFC (2): Keeping two separate companies; DPM certainly prefers option 1 and when it was rejected, DPM will face some difficulties in the medium to long term because: (1) business cooperation between the two companies is underwriting, reflecting uncertainty about the time of the contract. If the underwriting contract ends, PVCFC will become a heavy-weighed competitor of DPM. So, the scenario of 1+1<2 is more likely than 1+1>2 after the deal failure.

3.     Impacts on DPM’s Shareholder’s Rights

The analyst’s survey conducted with 10 institutional and individual investors showed that individual investors cheered the failure while institutional ones did not.

Individual investors preferred not to buy as within 1 year from now, DPM will not have to pay VND2.5 trillion cash and it could create VND250 billion interests or 6.5% yield/year/charter capital, a dreamed number. If DPM doest not buy PVCFC, it may pay more dividend for investors.

However, institutional investors saw that DPM’s failure to buy PVCFC will result in changes of its position in urea market in short-term. After 2013, if DPM wants to buy PVCFC after privatization, the price is expected to be 2-3 times higher than it is now. It is noted that fund managers have been supporting DPM with assumption that it could buy PVCFC.

With the fact that gas sold to DPM rose 40% early this year and will rise 2% each year until 2015, DPM can be assured in the next 3 years thanks to depreciation and higher urea prices in Q2/2012. However, shareholders cannot expect much in the last 6 months of the year as urea prices have been moving as shown in the figure: (Q2/2012 is the peak of the urea prices and the prices were back to normal now).

The analyst forecast DPM’s net profit in the first 9 months of this year at VND2.6 trillion or EPS at VND6,800 in the period. The whole year EPS is forecasted at VND8,200. However, if the urea prices do not see any sudden change, DPM’s EPS will not grow in 2013.

4.     DPM  May Invest in NH3 After The Deal Failure

Ammonia (NH3)  project with a capacity of 450k T/ year is the second priority after PVCFC. The project has total capital of $560 million and DPM will cooperate with PVGAS to implement the project. If the two sides go by half (50-50), DPM will have to invest $80 million counterpart fund (Reciprocal capital). It is clear that cash in DPM’s account will sooner or later be disbursed in one of the projects in their priority.

Therefore, it is hard to expect very high cash dividend payment. The analyst expects DPM to raise cash dividend payout in 2012 by VND1,000/share thanks to Q2/2012 higher profit on unexpected higher urea prices.

With its book value at VND23,000/share, DPM is very likely to be asked by some shareholders to split shares to pressurize dividend payout in the future. It is recently rumored that the split ratio is 2-for-1.

With 3 factors: (1) DPM could not catch the potential of being the controlling player in the urea market in the near future (at least until PVCFC is privatized), (2) if Urea prices do not rice sharply, (3) if DPM does not raise much dividend payout this year, the hot story about DPM ends and DPM share price upside is around 10-12% from current level, the analyst expected.