Itafos (TSXV: IFOS) is a pure play phosphate and specialty fertilizer platform with an attractive portfolio of strategic businesses and projects located in key fertilizer markets, including North America, South America and Africa. It owns and operates Itafos Conda, which is a phosphate fertilizer business engaged in manufacturing monoammonium phosphate, super phosphoric acid, merchant grade phosphoric acid and ammonium polyphosphate and is located in Idaho, United States.

Investment Rationale

• Delivered decent Q2FY20 financial and operational performance: In the three months ended to June 30, 2020, the company reported strong financial and operational performance, as the company reported a 582% increase in the adjusted EBITDA on a YoY basis primarily because of improved margins at Itafos Conda, cost savings following the idling of Itafos Arraias, and implementation of aggressive corporate-wide cost savings and deferral of spending initiatives.

• Strong Relative Strength: Shares of IFOS reported relative price strength on the Toronto Stock Exchange, as its shares surged approximately 47% in the last three months and outperformed the benchmark index by 45.53%. In a month over period, its shares increased approximately 60% and significantly outperformed the benchmark index by 65% and over the past five days its shares soared approximately 21% and outperformed the benchmark index by 24%. The above price performance of the IFOS shares reflects a strong relative price strength, which is considered as a favourable price trend in the stock.

• Stock is Hovering in a Bullish Trend: At the last traded price of CAD 0.44 (on September 08, 2020), its shares have traded above the crucial short-term as well as long-term support levels of 30-day, 50-day, 100-day and 200-day Simple Moving Averages (SMAs), which suggest that the stock is in bullish trend. Further, the Price/200-day SMA ratio of the IFOS stood at 1.14x, which reflects that at the last traded price, the stock traded approximately 13.4 per cent above its 200-day SMAs, which is another positive price trend in the stock. Also, the Moving Average Convergence Divergence (MACD) is rising, with the gap between the 12-day Exponential Moving Average (EMA) and the 26-day EMA is positive, which is another positive price trend in the stock. Also, the leading momentum indicator 14-day Relative Price Strength (RSI) is hovering in the neutral zone and tilted towards the overbought zone, which indicates a potential upside from the current price level.

• Volume Spurt: A volume spurt has been witnessed at the IFOS counter, with the 5-day average traded volume in the stocks was approximately 70% higher than the 30-day average daily traded volume, and the 30-day average volume traded in the stocks was approximately 14% higher against the 90-day average volume traded. A volume spurt in the stock, coupled with price upsurge reflects that the buying interest is rising in the script.

• Risk associated to Investment: As the outstanding market capitalization of the IFOS shares stood at CAD 82.45 million, which ranks it among the penny-cap listed and traded on the Toronto Stock Exchange and exposes its investors to the liquidity risks, given the lower free-float market capitalization. A further break out of COVID-19 may result in supply chain disruption.

2QFY20- Financial Highlights

Source: Company Filings

• In the three months ended to June 30, 2020, the company reported a revenue decline of approximately 39.7% on a YoY basis, mainly because of lower sales volumes and lower realized prices from continued downward pressure on diammonium phosphate New Orleans prices to which MAP sales prices are linked at Itafos Conda and the idling of Itafos Arraias.
• Total production volumes were down year-over-year primarily due to a disruption in sulfuric acid from its primary supplier resulting in lower APP and MAP production.
• The group’s adjusted EBITDA increased significantly on a year-over-year basis, primarily due to improved margins at Itafos Conda, cost savings following the idling of Itafos Arraias, and implementation of aggressive corporate-wide cost savings and deferral of spending initiatives.
• The company’s net debt was up by 13% against the year-over period, due to lower cash and cash equivalents and additional debt resulting from paid-in-kind interest related to the company’s secured term credit facility.
• For the three and six months ended June 30, 2020, overall fertilizer market prices remained depressed, particularly granular products, after a sharp decline since Q1 2019 due to lower consumption resulting from unusually wet weather conditions in North America.
• Total capex was down year-over-year primarily due to the idling of Itafos Arraias.
• The company’s cash costs per tonne P2O5 were down year-over-year, primarily due to lower input costs from improved mining rates and lower raw material costs.
• Further, the company’s maintenance capex was down year-over-year primarily due to the company’s decision to conduct a reduced scope plant turnaround at Itafos Conda during July 2020 as part of its risk mitigation measures during the COVID-19 pandemic. Growth capex was down year-over-year primarily due to reduced spend at Itafos Farim upon reaching construction-ready state.

Stock Price Performance

In a year-over period, shares of IFOS were featuring a negative price return of 72% and down approximately 32% on a YTD basis and were underperforming the benchmark index in the same periods. However, over the past three months, its shares have generated a price return of 46.67%, and increased ~60% in a month over period and outperformed the benchmark index significantly in the same time period.

In the past 52 Weeks, IFOS shares have tested a 52W High price of CAD 1.53 as on September 19, 2019 and a 52W Low price of CAD 0.21 as on February 28, 2020. At the lats traded price, its shares traded approximately 71.24% below its 52W High price level and 114% above its 52W Low price level.    

1-Year Price Performance (as on September 08, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Top-10 Shareholders

Top-10 shareholders held around 74.45% stake in the company. CL Fertilizers Holdings, L.L.C. and Pala Investments, Ltd. are among the largest shareholder in the company and carrying an outstanding position of 67.38%, and 6.55% respectively. Further, 4 out of top-10 shareholders have increased their stake in the company over the last three months, with CL Fertilizews and Cina (Antonio) are among the top investors which have increased their stakes by 0.81 million and 0.04 million, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: All figures have been taken from Refinitiv (Thomson Reuters).

Stock Recommendation: The company reported strong financial and operational performance in the second quarter of 2020. Also, generated adjusted EBITDA of CAD 11,324, reflecting a 582% increase year-over-year primarily due to improved margins at Itafos Conda, cost savings following the idling of Itafos Arraias, and implementation of aggressive corporate-wide cost savings and deferral of spending initiatives. The company is working on extending Itafos Conda’s current mine life through advancing permitting and development of H1/NDR and focusing on optimizing Itafos Conda’s EBITDA generation capability. The company is advancing aggressively on corporate-wide cost savings and deferral of spending initiatives. The company is also working on capital raising initiatives to support the company’s strategic initiatives and development objectives. However, the company has relatively higher debt, with debt to equity ratio of 1.93, whereas industry median stood at 0.92x. This higher debt contribution indicates relatively higher balance sheet risks for the company.

Further, a volume spurt has been witnessed in the IFOS counter, with the 5-day average traded volume in the stocks was approximately 70% higher than the 30-day average daily traded volume, and the 30-day average volume traded in the stocks is approximately 14% higher against the 90-day average volume traded in the stock. A volume spurt in the stock, coupled with price upsurge reflects that the buying interest is rising in the script.

Therefore based on the above rationale and valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the closing price of CAD 0.44 (as on September 08th, 2020), with a double digit upside potential, based on the NTM Peer’s Average EV/Sales multiple, on the FY20E Sales. We have considered CVR Partners LP, Intrepid Potash Inc and American Vanguard Corp etc., as a peer group for the comparison purpose.

*Recommendation is valid at September 9, 2020 price as well.

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