Phosagro (MCX: PHOR) — the largest producer of phosphate fertilizers in Russia and Europe and the world leader in terms of production of high-grade phosphate raw materials. The company controls the entire production process - from the extraction of raw materials to processing and release of finished products.
27 January, the company released a press release on the results of 2021. Annual volumes of production and sales of fertilizers for the first time exceeded 10 million tons of products, although year-on-year growth was only 3%.
10 February the company summed up the financial results of the year, where it reflected the growth in revenue 65,6% and net profit 666,3%. Besides, The board of directors announced a record final dividend — followed by a rise in quotations.
I propose to evaluate the dynamics of the main indicators, to understand, how businesses managed to break records in 2021.
Disclaimer: if we write, that something went up or down by X%, then by default we mean a comparison with the report data for the same period last year, unless otherwise stated.
Market position
Against the backdrop of rising inflation, disruption of supply chains, rise in prices of raw materials and other, less significant factors in 2021, fertilizer prices rose strongly. Prices for phosphate and nitrogen fertilizers almost doubled compared to 2020. This had a positive impact on the income of fertilizer producers., but hit the pockets of agricultural producers and end consumers.
The main growth came from 2 semester due to several factors:
- Increased demand from agricultural producers against the background of the purchase of fertilizers for spring sowing.
- Energy crisis in Europe, which led to higher prices for natural gas and electricity.
- Decrease in exports of fertilizers from China after the introduction in mid-October of restrictions in favor of the domestic market.
Against the backdrop of rising prices for fertilizers, the Russian government introduced a number of restrictions, to protect the domestic market. Producers of mineral fertilizers were obliged to freeze the cost of production at the level of the average values of May-July 2021, as well as prepare a supply plan for the domestic market, so that Russian consumers can receive the necessary volumes of fertilizers for the upcoming sowing season.
Production
In recent 10 For years, the business has been actively investing in expanding production capacity and strengthening vertical integration. As can be seen from operational reports, it bears fruit. At the end of 2021, the holding updated historical highs in terms of fertilizer production, adding 3%, – volumes increased to 10.31 million tons.
PhosAgro produces two main types of fertilizers: phosphorus and nitrogen, which are used in agriculture to increase productivity.
Nitrogen fertilizer output increased by less than 1% — up to 2.41 million tons — due to a decrease in urea production due to scheduled equipment repairs in 3 quarter of 2021. The volume of production of phosphorus-containing fertilizers and feed phosphates increased by 4% — to a record 7.89 million tons — thanks to an increase in the production of basic phosphate fertilizers: DAP, MAP and NPK.
The launch of the first stage of a new plant in Volkhov with a design capacity of 300 thousand tons per year also contributed to the growth in production..
PhosAgro independently provides itself with all the necessary raw materials during the production. The company produces apatite and nepheline concentrates at its own mining and processing plant "Apatit", which are used in the production of fertilizers and feed additives.
The output of raw materials increased by 6% — up to 12.49 million tons due to the growth of phosphoric acid production by 9% and sulfuric 8% against the backdrop of equipment upgrades. The total volume of output of apatite and nepheline concentrates has renewed its historical maximum by an increase of 1% - up to 11.8 million tons, despite the weak momentum.
Fertilizer production volume, million tons
| Phosphoric | Nitrogen | Total | |
|---|---|---|---|
| 2017 | 6,61 | 1,73 | 8,34 |
| 2018 | 6,85 | 2,12 | 8,98 |
| 2019 | 7,26 | 2,25 | 9,51 |
| 2020 | 7,58 | 2,40 | 9,98 |
| 2021 | 7,89 | 2,41 | 10,31 |
Volume of production of raw materials and concentrates, million tons
| Raw materials | concentrates | |
|---|---|---|
| 2017 | 9,36 | 10,53 |
| 2018 | 10,14 | 11,05 |
| 2019 | 10,75 | 11,69 |
| 2020 | 11,8 | 11,7 |
| 2021 | 12,49 | 11,8 |
Sales
Phosagro's sales also kept pace with production records.
Due to strong demand in key markets, total fertilizer sales increased by 3% - up to 10.26 million tons.
Phosphate fertilizers. Sales grew by only 1% — up to 7.76 million tons — against the backdrop of stable demand in Russia and Latin America.
Nitrogen fertilizers. Sales growth amounted to 9% — they increased to 2.49 million tons. The main reason is the gas crisis in Europe amid rising prices. Natural gas is a key component in the cost of nitrogen fertilizer production. Thanks to this, Phosagro managed to increase its presence in European markets.
Fertilizer sales volumes, million tons
| Phosphoric | Nitrogen | Total | |
|---|---|---|---|
| 2017 | 6,49 | 1,62 | 8,11 |
| 2018 | 6,63 | 2,2 | 8,83 |
| 2019 | 7,26 | 2,2 | 9,45 |
| 2020 | 7,67 | 2,29 | 9,95 |
| 2021 | 7,76 | 2,49 | 10,26 |
Revenue and profit
Revenue. Phosagro in 2021 increased revenue by 66% — up to 420.5 billion rubles. Of these, 110.5 billion rubles fell on the domestic market, and 310 billion rubles - for export sales. Revenue growth was mainly driven by record sales of fertilizers on the back of a recovery in demand and prices in key markets.
Fertilizer export remains a key business in terms of revenue. Main sales regions:
- Europe: +76%, up to 116.8 billion rubles.
- South America: +148%, up to 103.9 billion rubles.
- North America: +159%, up to 31.8 billion rubles.
- Asia: +114%, up to 7.7 billion rubles.
Asian growth boosted by export restrictions in China, which forced agricultural producers to look for alternative sources of fertilizer supplies in 4 quarter of this year.
Structure of export revenue by geographic regions in 2021
| Europe | 37,7% |
| South America | 33,5% |
| North America | 10,2% |
| India | 6,4% |
| Africa | 5,8% |
| CIS | 3,9% |
| Asia | 2,5% |
Cost price. The growth in cost of goods sold amounted to 31%, or 206.1 billion rubles. Main causes: rising prices for raw materials, Work, port and freight services amid rising inflation. Besides, business increased commercial, business and administrative expenses, and also paid almost 4 times more taxes on the extraction of minerals due to the initiative of the Ministry of Finance to increase budget revenues by increasing the severance tax rate, among other things also for fertilizer producers.
Operating profit. The company increased its operating profit by almost 3 times last year to RUB 164.1 billion thanks to record sales on the back of high fertilizer prices.
With a stable ruble exchange rate, PhosAgro reduced its foreign exchange loss on financial activities from 26.4 to 0.5 billion rubles. Besides, The company cut coronavirus spending 1,4 up to 0.5 billion rubles due to the completion of the most acute phase of the epidemiological crisis.
Net profit. As a result, the company's net unadjusted income increased by 7,7 times - up to 129.7 billion rubles. In the press release, the adjusted net income data, to offset the effect of the revaluation of various non-monetary items in the financial statements. Adjusted net income growth is much more modest, but still impressive: the company has earned 3 times more, than a year earlier, and updated the historical maximum - 130.2 billion rubles.
PhosAgro's Financial Results, billion rubles
| Revenue | Operating profit | Net income before adjustments | Net income after adjustments | |
|---|---|---|---|---|
| 2017 | 181,4 | 36 | 25,3 | 21,2 |
| 2018 | 233,3 | 54 | 22,1 | 41,7 |
| 2019 | 248,1 | 51,7 | 49,4 | 37,1 |
| 2020 | 253,9 | 59 | 16,9 | 43,4 |
| 2021 | 420,5 | 164,1 | 129,7 | 130,2 |
Dividends and debt
Dividends. Phosagro has been paying dividends in recent years 4 times a year at the end of each reporting quarter. Free cash flow is taken as the basis for calculating dividend payments.
In 2021, free cash flow increased by 80% — up to a record 77.9 billion rubles. Totally agree 4 quarter, the business generated 22.9 billion rubles of free cash flow - that is, the base for dividend payments is more than impressive.
The rate of payments depends on the level of debt load, which is determined by the ratio "net debt / EBITDA». At the same time, the document contains a condition, that the company's dividend cannot be less 50% from adjusted net profit.
Dynamics of free cash flow, billion rubles
| 2017 | −5,9 |
| 2018 | 20,5 |
| 2019 | 28,3 |
| 2020 | 42,5 |
| 2021 | 77,9 |
−5,9
Debts. Despite the investment program in the amount of 50 billion rubles, Phosagro's net debt for 12 months decreased slightly to RUB 153.7 billion due to a reduction in the volume of short-term loans and an increase in the volume of cash and cash equivalents in accounts.
At the same time, EBITDA increased over the year by 2,2 times - up to a record 191.8 billion rubles, - and the ratio "net debt / EBITDA" decreased from 1,9 up to 0.8 ×. This indicates good financial stability of the business and reduces the risks for dividends..
As a result, the Board of Directors of PhosAgro recommended to allocate for payments based on the results 4 quarter 390 R per ordinary share, among other things, and from undistributed net profit of previous years. The dividend yield as of the news release date was almost 6% to the share price on the stock exchange, which led to an increase in the issuer's quotes at a certain moment by 6%.
Debt dynamics, billion rubles
| net debt | 12mEBITDA | net debt / 12mEBITDA | |
|---|---|---|---|
| 2017 | 120,0 | 50,8 | 2,4× |
| 2018 | 135,3 | 74,9 | 1,8× |
| 2019 | 131,6 | 75,6 | 1,7× |
| 2020 | 156,9 | 85,7 | 1,9× |
| 2021 | 153,7 | 191,8 | 0,8× |
The amount of dividend payments per share
| 2016 | 165 R |
| 2017 | 81 R |
| 2018 | 192 R |
| 2019 | 192 R |
| 2020 | 297 R |
| 2021 | 885 R |
165 R
What's the bottom line?
Thanks to a competent investment strategy, PhosAgro's business demonstrates outstanding results. Let me remind you, that for many years there was a crisis of overproduction on the world fertilizer market, which put pressure on demand and prices. But the company, contrary to the short-term trend, all these years, has been implementing a large-scale investment program to increase fertilizer production and increase vertical business integration.
Now, when the trend in the cyclical market has changed, PhosAgro took full advantage of the favorable price situation and achieved record output volumes at the time of the highest prices. Particularly shocking for the company was 4 neighborhood, when strong demand from farmers overlapped with export restrictions from producers in China and Europe.
Don't forget, that Phosagro was in an advantageous position in the conditions of the European energy crisis. In Russia, electricity and natural gas prices are pegged to tariffs, which are regulated by the State. Consequently, prices have risen much less, than in European countries. This allowed domestic producers to gain a competitive advantage due to the low cost of fertilizer production under conditions, when many foreign players are forced to close production due to low profitability.
Such an imbalance in the global fertilizer market forces the Russian authorities to intervene in the situation., to prevent further price increases and supply shortages in the domestic market. Probably, in 1 half of 2022, the market will see a correction in prices for fertilizers - a decrease from peak values 4 quarter of 2021 as the market situation stabilizes, but so far there are no prerequisites, that prices will return to pre-crisis levels.
