AKD Daily – EPCL: CY11 Result Preview

Karachi: EPCL is scheduled to announce its full year CY11 results on 3rd Feb,12. We expect EPCL to post NLAT of PkR421mn (LPS: PkR0.64) in CY11, which will be an improvement over CY10 NLAT of PkR770mn (LPS: PkR1.16). Moreover, we expect a sequential improvement in 4QCY11 profitability where the company should post a small profit of PkR19mn (EPS: PkR0.03) compared with NLAT of PkR245mn in 3QCY11.

While the company has achieved some semblance of stability at its key VCM plant which should result in improvement in profitability going forward, we do not rule out the possibility of a rights issue with the result given repayment of ~PkR2.5bn long term loans in CY12, surging ethylene prices (currently at 8-month high of US$1,180/ton) and recurrence of production issues at VCM plant.

EPCL to post first quarterly profit since 2QCY09: Given the improvement in VCM production profile, we expect significant recovery in EPCL’s profitability in 4QCY11, where we expect the company to post its first quarterly profit since 2QCY09.

The company is forecast to post a small profit of PkR19mn (EPS: PkR0.03) in 4QCY11, compared with NLAT of PkR245mn (LPS: PkR0.37) in 3QCY11. Strong rebound in margins following improved production at the VCM plant is expected to drive operating profits in 4QCY11, where we estimate gross margins (GMs) to jump sequentially by 715bps QoQ to 17.8%. Margin expansion is expected despite the QoQ fall in PVC prices, following improved in-house VCM production, reducing the need for expensive VCM imports. Furthermore, int’l ethylene prices were down by 3%QoQ, which should add further impetus to the margin expansion.

Outlook for CY12: While the improvement in VCM production is a very welcome development for EPCL, 2012 has started on a slightly negative note for the company given the sharp rise in ethylene prices, which are currently at their 8 month high of US$1,180/ton. Petrochemical prices in general have been on the rise since end Nov’11, following the surge in naphtha prices (higher oil price), which has forced many players to raise end product prices to maintain margins. Resultantly, despite the slight recovery in PVC prices, int’l PVC-Ethylene PMs have shrunk to US$394/ton in Jan’11, where PMs in CY11 averaged at US$500/ton. For EPCL, we have assumed a long term PVC-Ethylene PM of US$550/ton, which is higher than the int’l average due to PVC selling at a premium in Pakistan. Based on our sensitivity on PVC-Ethylene PMs, a US$50/ton change in PM would lead to an average change in EPS of PkR0.5 for EPCL. At current levels we have a Neutral stance on EPCL with a target price of PkR8.17/share. Key triggers for the scrip would be i) stable production at VCM plant, ii) improvement in PVC-ethylene margins, and iii) monetary easing.

For more information contact:
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