 We believe stronger fertilizer prices are here to stay with solid fundamentals, but DM stocks have underperformed vs EM  FY21-23e EBITDA for our coverage is 49-113% higher than FY18-20a average, underpinning strong cash generation  We prefer Buy-rated OCI and NTR; upgrade CF and MOS to Buy from Hold, reiterate Reduce on SAFCO, Hold on Maaden A second leg of fertilizer price rally since the unseasonal June, upward revisions to consensus and strong 2Q21 results failed to act as a catalyst for DM stocks that have underperformed vs EM. Investors are likely sceptical about the sustainability of a price rally, its realisation into books and the impact of rising feedstock costs for DM stocks. We, however, see strong catalysts for prices/earnings while the current valuation provides a safety net for Buy-rated stocks like OCI, NTR, MOS and CF.

Key price catalysts: We believe supply disruptions, higher feedstock costs and low inventories are the catalysts that could support strong prices through 1Q22. Several major nitrogen plants are under outages that extend through 2H21. Supply issues are further compounded by an unprecedented rise in European gas costs and potential trade disruptions like suspension of Chinese exports, sanctions on Belarusian potash, and possible US duties on UAN. The possible re-emergence of La Nina by 4Q21 is an upside risk to fertilizer prices that could bring back memories of 2010-12 when two consecutive La Nina (at a higher scale than 2020) sent prices much higher.

We revise our NPK price estimate by 12-45%. Our forecasts imply FY21-23e average EBITDA for our coverage universe to be 49-113% higher than the FY18-20a average. This ensures strong generation (FY21-22e FCF yield of 9-12% for US stocks) that in turn boosts return of cash to shareholders and propels investment in growth projects like blue ammonia (Nitrogen and reinvestment economics, 24 May 2021).

Prefer DM stocks as current valuation looks attractive with 1yr fwd EV/EBITDA c20% lower than the five-year average (page 2). OCI and CF are trading well below the valuation implied by mid-cycle prices. We upgrade CF and MOS to Buy from Hold and reiterate our Buy ratings on OCI and Nutrien, Hold on Maaden and Reduce on SAFCO. We prefer NTR given the favorable risk to reward, and OCI given the deleveraging opportunities and return of cash to shareholders from 2022.