Bank of America sees 50% upside in this global fertilizer stock due to a worldwide shortage

Published Wed, Jan 4 202310:10 PM EST

Shares of Sabic Agri-Nutrients are expected to rise by more than 50% over the next year thanks to a limited fertilizer supply worldwide, according to Bank of America. The company, formerly known as Saudi Arabian Fertilizer Company, is one of the largest producers of fertilizers, with an annual production capacity of about 4.5 million tons. The price increase over the past year for natural gas, a critical raw material, has sent the cost of fertilizers soaring globally , benefiting the Saudi chemical company's bottom line. Natural gas prices have more than doubled to $4 per million British thermal units (MMBTU) over the past year due to the Russia-Ukraine conflict. In contrast, BofA analyst Sashank Lanka said Sabic Agri-Nutrients pays $1.25/MMBtu for the gas, owing to its relationship with Saudi petrochemicals company Sabic, which is a majority shareholder. "Our Buy rating is driven by our expectations of stable earnings momentum over the medium term," said Lanka in a note to clients on Jan 3. "We also expect the urea cost curve to steepen, supported by rising gas prices in EU and Asia along with high coal prices," Lanka added. Although gas prices have eased since their August peak, analysts expect demand to pick up in Europe during the winter. "This may push the gas prices upwards, keeping pressure on European Urea producers and may benefit SABIC Agri-Nutrients which has a fixed-cost feedstock," said Jassim Al-Jubran, head of sell-side research at Aljazira Capital, in a note to clients after the company's third-quarter results last year. Sabic Agri-Nutrients reported an increase in net profits by 93.3% to 2.3 billion Saudi riyals ($610 million), compared to the previous year. Al-Jubran expects the stock to rise by 26% to 179 Saudi riyals. Bank of America also noted that China's export ban of fertilizers, potentially until June 2023, to support domestic agricultural consumption with sufficient supply at low prices will further reduce global supply. While U.S. investors can gain exposure to Sabic Agri-Nutrients through the Franklin FTSE Saudi Arabia ETF , European investors can access the stock through the iShares MSCI Saudi Arabia Capped UCITS ETF.