Fertile Ground to Blossom
We are initiating coverage of the Brazilian fertilizer companies Fosfertil
(FFTL4) and Heringer (FHER3). Although in the same sector, Fosfertil and
Heringer each have a different position in the fertilizer value chain. Fosfertil is the
main national supplier of raw materials and intermediate products for the
fertilizer industry in Brazil, while Heringer’s core business is distribution.
The long-term outlook for fertilizer demand is promising, following an
increase in food and biofuel consumption. The downtrend of world fertilizer
prices seems overdue at this point, and a rebound is likely. However, a strong
rebound is improbable due to the slowdown in world grain prices and to a surplus
scenario for the world fertilizer supply/demand balance.
Prospects for fertilizer demand in Brazil are positive, and a recovery is
expected for 2010. Credit availability will help as well as the resumption of
application rates in the sugarcane crop. In the longer term, we expect Brazil to
post robust growth, remaining a price taker despite capacity additions.
Highlights

Both valuation and momentum support our outperform
recommendation on Fosfertil at this point. Our YE10 fair value
R$23.3/FFTL4 implies an upside of 25%. In spite of the apparent
premium to global peers from a multiple perspective, Fosfertil is indeed
trading at a discount when we adjust multiples for growth. We expect positive
earnings momentum from 4Q09 onwards on the back of improvement in sales
volumes and margins. Furthermore, the original plan to incorporate Bunge
Fertilizantes is back on the table. Despite the valuation risk, the incorporation
makes a lot of sense, we believe, from a strategic point of view.

We are initiating coverage of Heringer (FHER3) with a sector-perform
recommendation and a YE10 fair value of R$14.1/FHER3, implying an
upside of 15%. In spite of the limited upside, we expect the company to
benefit from a more favorable environment marked by the upward trend in
fertilizer prices, providing for inventory gains and the recovery of domestic
fertilizer sales.
INDEX
SECTION 1 INVESTMENT THESIS ...............................................................03
SECTION 2 OVERVIEW OF THE GLOBAL FERTILIZER MARKET ....................07
SECTION 3 BRAZIL’S FERTILIZER SECTOR.................................................13
SECTION 4 FOSFERTIL – A SOUND BUSINESS MODEL................................22
SECTION 5 HERINGER – TOO LITTLE MARGIN FOR TOO MUCH RISK..........29