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جو شخص بہانہ بنانے میں بہت اچھا ہو ، وہ کسی اور کام میں اچھا نہیں ہو سکتا
پیسہ بدترین آقا ہے، مگر بہترین غلام بھی ہے
کسی فرد یا قوم کو برباد کرنا ہے تو اس کی امید کو مار ڈالیے اور اگر اسے تعمیر کرنا ہے اس کی امید کا دیا روشن کیجئے
کامیابی سوچ سے ملتی ہے
زندگی کی دوڑ میں دوسروں سے آگے نکلنے کیلئے تیز چلنا ضروری نہیں، بلکہ ہر رکاوٹ کے باوجود چلتے رہنا اور مسلسل چلتے رہنا ضروری ہے
جب باتیں آمنے سامنے ہوتی ہیں تو جھوٹ اور غلط فہممی کا خاتمہ ہو جاتا ھے
بہت اونچے پہاڑ پر چڑھنے کے لئیے قدم آہستہ آہستہ اٹھانا پڑتے ہیں
تین چیزیں نیکی کی بنیاد ہیں، تواضع بے توقع, سخاوت بے منت اور خدمت بے طلبِ مکافات
غربت اور افلاس کی وجہ پیداوار کی کمی نہیں، بلکہ اسکی غلط تقسیم ہے
دولت ہونے سے آدمی اپنے آپ کو بھول جاتا ہے اور دولت نہ ہونے سے لوگ اس کو بھول جاتے ہیں
Margins sustained, 1QFY17 EPS Clocked in at PKR 1.27, up by 41x
Financial Performance CY16
During CY16, EPCL turnaround to profit of PKR 655mn from loss of PKR 649mn in SPLY, owing to increment in topline by 3% which was led up by increase in PVC prices by 23% YoY to USD 933/MT from USD 723/MT, coupled with significant growth in local PVC offtake by 12.7% YoY from 149 KT in CY15 to 169KT in CY16. Total local demand of PVC stood at 211 KT of which 80% (169 KT) was fulfilled by EPCL while rest of demand was satisfied through import. Gross margins of the company raised by 5pps primarily due to reduction in ethylene prices by 6.6% to USD 1,045/MT in CY16 from USD 1,120/MT. In the same year company reassessed the plant’s useful life which led a positive post-tax adjustment of ~PKR 297mn in depreciation expenses, hauling the EPS up by PKR 0.45.
Financial Performance 1QCY17
During the 1QCY17 company posted its EPS of PKR 1.27 (PAT of 885mn) portraying 41x growth as against the last year EPS of 0.03. The massive improvement in bottom line is primarily due to high premium charged by the company on PVC offtake (average prices $923/MT for Q1 as against average prices of $775/MT in SPLY, up by 19% YoY%) coupled with surge in PVC demand in local markets owing to escalation in construction activities. Upswing in PVC prices by 19% YoY coupled with reduction in ethylene prices by 3.3% YoY to $1090/MT in Q1CY17 from $1128/MT in SPLY accelerated gross margins by 16pps. Likewise other income portion witnessed a huge growth of 558% YoY from PKR 3.6mn to 24mn owing to increase in non-financial assets (scrap sales, disposal of operating assets).
What’s more? Future outlook
EPCL Being a market leader in PVC manufacturing with, future outlook of the EPCL seems to be positive, demand in PVC is likely to be increased owing to rise in construction activities, infrastructure projects and government spending. On-going CPEC project likely to be served as major growth catalyst which will directly impact on topline. Ethylene and PVC prices are likely to remain normalized, ensuing stabilization of margins. Moreover, company is mulling for increasing plant capacity to 195 KT by debottlenecking measures. However, company is facing risk related to influx of imported chemical from china by local players, which is like to hit EPCL revenues.
Company Overview and Business Model
Engro Polymer & Chemical Limited is subsidiary of Engro Corporation Limited and was incorporated in 1997 as a public limited company. EPCL operates in Chloe-Vinyl segment and involve in production and distribution of PVC, ECM, Caustic soda, Hydrochloric acid and sodium Hydro chloride. Profitability of EPCL mainly depends on domestic demand, Vinyl Chain Prices, Ethylene prices, energy prices and currency fluctuation.
EPCL business model is divided in two market PVC and allied product & Caustic and allied product.
PVC and allied products
PVC is the primary product of EPCL and is mainly use in the manufacturing of the pipes and other related products, profitability of PVC is driven by the ethylene prices chlorine prices.
Caustic and allied product.
EPCL launched caustic soda for the first time and it very quickly made its way in the domestic market. Caustic Soda is largely used in the textile industry for processing, soap industry as a raw material, as well as several other industries for water treatment.
FINANCIAL RESULT FOR THE HALF YEAR ENDED 30/06/2017
(UNCONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 1,588.398
(UNCONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 1,044.179
(UNCONSOLIDATED) EPS = 1.57
(CONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 1,591.242
(CONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 1,046.170
(CONSOLIDATED) EPS = 1.58
EPCL announced its results for 2QCY17, where EPS clocked in at PKR 0.3, up by 9x YoY and down by 76% QoQ.
Earnings remained under pressure this quarter mainly due to 1) decline in gross margins by 12pps QoQ owing to lower core delta of the company due to procurement of raw material at higher prices from a diversified supplier base, lower PVC prices and shutdown of plant 2) increase in effective tax rate by 18pps QoQ due to implication of super tax in the current quarter.
The higher earnings YoY basis is attributable to higher volumetric sales and higher PVC-ethylene core delta YoY ($388/MT in 2QCY17 as compared to $255/MT in SPLY).
As a positive development, NTC imposed preliminary duties on import of PVC resin. However, prices of PVC remained moderate throughout the quarter due to imports coming in from other sources.
Regulatory duty of 2% had been imposed on imports of PVC.
The PVC and VCM plant debottlenecking is on track to enhance production capacity by year end.
Going forward, the management expects PVC and caustic soda demand to remain stable.
Engro Polymer & Chemicals
Below-expected drop in margin may deliver 3Q EPS surprise
Our working shows the drop in average margin (based on FOB prices) is quite limited at 7%QoQ contrary to market perception of precipitous decline in PVC-Ethylene core delta due to hurricane season in the US.
This is positive for Engro Polymer & Chemicals (EPCL) which should be able to ditch trend in int'l market and should see 4% QoQ improvement in gross margins, in our view, on account of reduction in premium on Ethylene purchases and high-base of duties.
We anticipate EPCL to post EPS of PKRO.67 in 3QCY17 depicting jump of 130% QoQ. Based on sensitivity of earnings for CY17/18 on PVC-Ethylene delta, we estimate EPCL can deliver PKR2.92-3.3 EPS in CY17 and PKR4.19-4.59 EPS in CY18.
Two key events to watch out for EPCL are (i) progress on companfs BMR project, and (ii) update on finalization of anti-dumping duty.
While our estimates and TP remain under-review, we see a big disconnect in near-term stock price correction (down 4%) as the market has not factored in (i) likely positive surprise in 3Q earnings and (ii) improved outlook on PVC-Ehtylene core delta, in our view.
Hurricane season temporarily derailed positive trend on PVC-Ethylene margin: Ethylene, one of the largest volume petro-chemical in the world, was on the verge of price correction led by uptick in supply caused by growing capacity from the US (shale gas to ethylene) however, in August hurricane Harvey caused shutdown of 60% ethylene capacity in the Texas region and new projects may face a delay of 6 months. This caused margin to slip in the range of USD343-355/ton from USD438/ton in Jul/ 17 given that US is one of the major suppliers. As hurricane Harvey subsided, Ethylene producers resumed operations promptly as evident by the fact that by mid Sept' 17 only 10% of the capacity remained nonoperational. Contrary to the market consensus core delta in 3QCY17 plunged by only 7%QoQ to USD354/ton. In the long run we foresee dip in margins as crude oil prices are expected trend lower given intensified focus on renewable energy globally. Furthermore, discovery of shale gas reserves may further depress ethylene prices as more producers are showing interest in setting up new shale to ethylene crackers in the US; exerting renewed downward pressure on prices. Latest data reveals the delta has improved to USD360/ton as ethylene price clocked in at USD1,200/ton in South East Asia (SEA) region whereas PVC price observed slight uptick to USD960/ton, further expanding core delta. This may benefit EPCL as its margins are highly correlated with international trend.
Likelihood of improved earnings: Despite dip in core delta to USD354/ton (down 7%QoQ) in 3QCY17, we anticipate EPCL to post EPS of PKRO.67 in 3QCY17 depicting jump of 1.3xQoQ on the back of improvement in gross margin ed by consistent supply of ethylene. To note, the company had to source ethylene (main raw material for PVC) from other regions in 2QCY17 as their main supplier ADNOC's (Abu Dhabi National Oil Company) plant was shut down after a fire incident in Dec' 16. This resulted in the company paying premium to source ethylene from other suppliers. During the current quarter, however, management was able to procure its raw material on a consistent basis from Europe and Middle East. Hence, in the absence of supply disruption and premium paid on raw material, gross margins may improve by 4%QoQ, in our view. On a cumulative basis, significant jump in earnings (PKR2.25/sh) is projected to be led uptick in core delta (44%) and benefits being reaped from lower financing cost whereby the management restructured its long term debt by replacing higher mark-up (1.35-3.0%) debt with lower mark-up (0.8-3%). This may lower financial charges to PKR562mn Vs PKR682mn in 9MCY17.
Events to look out for in the near term: Recent developments within the company and on macro level shall bode wel for the company once progress is made on these fronts:
Imposition of anti dumping duties to benefit the company: The National Tariff Commission (NTC) imposed provisional anti-dumping duty (11-42%) on import of PVCResins from several regions in June' 17. To note EPCL already charges premium on parity price of PVC (which incorporates custom duty of 12% and regulatory duty of 1%), led by boom in construction activity, while being the only producer of PVC also enhances itspricing power. We believe imposition of regulatory duty on top of other duties further enhances pricing power of the company. We expect the management to take advantage of this situation and raise its price accordingly.
Debottlenecking due to rising demand: The management announced debottlenecking of its PVC plant to enhance its capacity to 195K tons (up 17K tons) by the end of CY17. This in our view has been done to meet robust demand of PVC, however this is only a short term solution as we project the company may have to come up with a long-term solution to not only meet local demand but also be capable of exporting PVC. To note, presently the company's capacity utilization stands at ~94%during the last five years whereby market share of EPCL's PVC dropped to 68% against in the last two years. The main culprit of this dip is capacity constraints where the company could not keep up with the pace of rising demand.
EPCL’s PVC capacity to reach 295K tons by 2021
To recall, existing debottlenecking of Engro Polymer and Chemicals Limited’s (EPCL) PVC plant (17K tons) was successfully completed in 4QCY17. While during 9MCY17, the company has produced 141K tons (51K tons in 3Q), at an average capacity utilization of 96%. That said, the company has announced a 100K tons expansion in its PVC capacity which will take the total capacity to 295K tons by 3QCY20. Moreover, total capital expenditure (CAPEX) of PKR 7,600mn has been approved for said expansion. Breakup of the CAPEX is as follows:
Capacity Expansion to be Financed Majorly by Right Issue
EPCL is expected to raise PKR 5,400mn (71%) through right issue. At present, major shareholding is held by Engro Corporation (56.2% stake), followed by Mitsubishi Corporation (holding 10.2% in total). We have assumed the company will issue the right at par (PKR 10/share) issuing 540mn shares (~81%) to raise the required amount of PKR 5,400mn. The board of EPCL has decided to increase its authorized capital (Dec’16: PKR 12,000mn, 800mn ordinary and 400mn preference shares @ PKR 10/share) to PKR 16,500mn divided into 1,250mn ordinary and 400mn preference shares having par value of PKR 10/share. The table below gives a sensitivity of right issue at different prices.
Additional Capacity can easily be absorbed
Domestic demand of PVC has significantly grown by 25% YoY to ~266 tons/annum during 9MCY17 and is expected to reach 352K tons/annum by 2021 (assuming 7% annualized growth). Currently, EPCL has a 73% market share (9MCY17) and is expected to maintain its market leader tittle by securing a market share ~70% in 2021 (80% in 2016). In order to cater to the robust PVC demand scenario, the company has also announced a 50K tons capacity expansion of VCM, where current capacity is 204K tons/annum and will reach to 254K tons/annum by 3QCY20. However, to fully utilize the PVC capacity, the company will have to import an additional ~40K tons of VCM. We have assumed the company will utilize in-house VCM to produce PVC, leading towards lower capacity utilization of PVC plant (~84% in CY21). Alongside the PVC expansion, the company has also announced a capacity expansion of 20K tons/annum of caustic flaker.
Engro Polymer & Chemical
Key Analyst Briefing Takeaways
EPCL: Earnings increased by 213% YoY to PKR 3.09/share in CY17
In its 4QCY17 financial result announcement today, Engro Polymer & Chemical (EPCL) posted a decline of 83% YoY / 88% QoQ in profitability to PKR 105mn (EPS: PKR 0.16) compared to PKR 626mn (EPS: PKR 0.94) in 4QCY16. This took the CY17 profitability to PKR 2,049mn (EPS: PKR 3.09), up by 213% YoY. Along with the result, the company also announced a cash dividend of PKR 0.80/share taking full year payout to PKR 1.25/share (Payout Ratio: 40.5%).
PVC production of the company has increased by 9% YoY to 188K tons compared to 172K tons in last year. The increase in production was observed amid debottlenecking of 17K tons during the year. Company sold 188K tons of PVC during the year, up by 11% YoY.
The company share in the PVC market remained at 67% during the year compared to 80% last year. The decline was on account of 33% YoY growth in local market to ~282K ton/annum from 213K tons last year.
During 4QCY17, production was up by 5% YoY to 46K tons due to debottlenecking, however, down by 10% QoQ due to scheduled shutdown.
Finance cost of the company increased by 20% QoQ due to exchange loss of PKR 50mn.
The company has paid off expensive loans of Engro Corporation worth PKR 3,000mm (KIBOR + 3.5%) with comparatively cheaper loans financed @ KIBOR + 0.4%. This will translate into annual saving of PKR ~0.10/share (after tax).
The company has booked an impairment of PKR 100mn due to expansion plans (have to dismantle some buildings to build the new ones).
Provisions of PKR 200mn also accrued on the back of store and spares.
Surge in distribution expenses (62% QoQ, 50% YoY) in 4QCY17 was due to commission adjustment of the dealers. On full year basis, these were up by 12%.
We have a BUY call on the scrip with Dec'18 target price (right adjusted at par, @81.4%) of PKR 30.9/share.