Itafos

Itafos (TSXV: IFOS) is a pure-play phosphate and specialty fertilizer platform with an attractive portfolio of strategic businesses and projects located in crucial fertilizer markets, including North America, South America, and Africa.

Key highlights

• A healthy set of numbers: The company delivered excellent operational and financial performance during Q1 2021, generating revenue of USD 90.1 million against USD 75.3 million, net income stood at USD 1.9 million compared to a net loss of USD 18.2 million and free cash flow of USD 14.7 million compared to negative USD 7.8 in Q1 2020, respectively. The group also shared higher guidance numbers for FY2021. Although we believe all these healthy aspects have been discounted in the recent price action of the stock.

• Increasing long term debts: The company reported higher long-term debt at USD 240.6 million as on March 31, 2021, compared to USD 237.7 million on December 31, 2020.

• Under performing margins: The company continues to underperform the industry median statistics, and despite displaying resistance in Q1 2021, the firm had a weak margin profile as compared to the industry. In comparison to the industry median of 0.87, the debt-to-equity ratio was high at 3.11. The chart below gives a glimpse of this. 

• Technical Indicators reflecting resistance: On the weekly chart, the IFOS price has recently shown some strength, and it is now sustaining near its significant resistance level of CAD 1.63. The stock price is roughly creating a double top pattern, indicating that the stock may meet heavy resistance. Furthermore, the momentum indicator RSI (14) is trading around 85.79 levels, which indicates that the stock is substantially overbought, and there may be a price correction or consolidation.
  

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company's revenues increased to USD 90.1 million, against USD 75.3 million in the previous corresponding period. The increase in revenue was mainly due to higher realized prices at Conda, partially offset by lower sales volumes.
• Gross profit for the reported period stood at USD 18.5 million, against a gross loss of USD 6.3 million in pcp. Gross profit increased mainly due to higher revenue and lower cost of goods sold.
• The company posted an operating income of USD 12.9 million in Q1 2021 against a loss of USD 12.2 million in the previous corresponding period. The volume of operating income went up due to higher revenues and low operating expenses.
• The company generated a net income of USD 1.9 million in Q1 2021, against a net loss of USD 18.2 million in the previous corresponding period, mainly due to the reasons stated above.

Risks associated with investment

The company is exposed to many risk factors that, alone or cumulatively can affect its operations and financial health. Some of the risks are the supply of raw materials and demand for finished goods, realizations prices of finished products, exchange rates, inflation, interest rates, etc. The group's operations mainly depend on the supplies from Rio Tinto; any disruption could play a massive role in the group's adverse financial performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

Recently, the company posted an excellent set of numbers reflecting operational and financial resilience. However, despite displaying decent performance in Q1 2021, the firm had a weak margin profile compared to the industry. In comparison to the industry median of 0.87, the debt-to-equity ratio was high at 3.11. Moreover, it increased its long-term debts to USD 240.6 million as of March 31, 2021. On the technical front, the stock seems to be trading in a steep overbought zone, where its RSI (14) is trading around 85.79 levels suggesting that there may be a price correction or consolidation. We believe that all the recent positives are factored in at the current price level. Hence, considering the aforesaid rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 1.55 on June 08, 2021, with double-digit (percentage term) downside potential. 

One-Year Price Chart (as on June 08, 2021). Source: Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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