The Bell about Chemicals – Elixir Securities Limited

Karachi: : Engro Polymer: Failure to stabilize VCM plant continues to hit bottom-line!

According to Elixir Securities Limited,


Key Financials Outstanding share: 663.5mn
(PKRmn) 1HCY11A 1HCY10A  YoY 2QCY11A 2QCY10A YoY
Net sales 7,895 6,810 16% 3,903 3,588 9%
Cost of sales 6,879 6,377 8% 3,407  3,303 3%
Gross profit 1,016  433 135% 495 286 73%
Distribution and

marketing expenses

386 279 38% 204 160 27%
Administrative expenses 171 140 22% 94 79 18%
Other operating expenses 68 154 -56% 64 146 -57%
Other operating income 43 20 117%  22   8 182%
Finance cost  753  645 17%  371  367 1%
Profit before tax  (319) (765)  (215)  (460)
Taxation 112 289  -61% 75 191  -60%
Profit/(loss) after tax (207) (476) (139)  (269)
EPS (PKR) (0.31) (0.72)  (0.21)  (0.41)
Source: Company Accounts, Elixir Research



Healthy growth in gross profit despite lower VCM production

Top-line of EPCL witnessed a surge of 9% YoY to PKR3.9bn during 2Q primarily attributable to higher prices. Demand for PVC and Caustic Soda remained stable at the level of 26k tons and 22k tons respectively. Consequently, during 1HCY11, net sales increased by 16% YoY to 7.9bn. Similar to 1Q, higher margins on integrated operations continued to provide support to bottom-line as a result of higher reliance on cheaper in-house VCM. Resultantly, gross margins surged around 470bps during 2Q. In-house VCM production stood at 21k tons in 2QCY11 as against 12k tons in 2QCY10. However, it was still lower than expectation. Integrated PVC-Ethylene margins after deducting fuel cost, hovered around an estimated USD772/ton during 2Q, while 1HCY11 average clocked in at USD734/ton, up 15% YoY. Elixir Securities Limited has assumed slightly higher PVC sales (65ktons) in 2HCY11 with total CY11 off take estimate of 120k tons, while Elixir Securities Limited expects integrated PVCE ethylene margin after deducting fuel cost at USD749/ton during CY11. Elixir Securities Limited estimates PVC demand to grow at 3-year (CY11-14) CAGR of 4%.

High interest cost hurting bottom-line

Higher finance cost post COD of VCM plant continues to offset operating profit growth from higher gross margins. Consequently, bottom-line during the quarter remained negative. Finance cost was recorded at PKR371mn in 2QCY11, taking 1HCY11 aggregate financial charges to PKR753mn, up 17% YoY. Higher finance cost reflects the effect of partial capitalization of finance cost during 1HCY10 as COD of the VCM plant was achieved on Sept’10.

Investment perspective

At yesterday’s closing price of PKR8.0/share, the scrip trades at CY12E P/E multiple of 5.6x, and offers an upside of 43% to Elixir Securities Limited’s Jun-12 PT of PKR11.5/share. However, EPCL’s margins and earnings highly dependent on stability of VCM plant as PVC-Ethylene margins are approximately 3.4x of PVC-VCM margins. Elixir Securities Limited has assumed integrated PVC-Ethylene margins (after deduction fuel cost) at USD749/ton during CY11. EPCL’s realized margin per ton of PVC was a mere USD557/ton during 1HCY11, due to 30% reliance on imported VCM. Elixir Securities Limited has assumed 0% reliance on imported VCM from CY12 onwards, which remains a key assumption to Elixir Securities Limited’s June-12 PT of PKR12/share. 30% reliance on imported VCM CY12 onwards would trim Elixir Securities Limited’s CY12 EPS by 51% to PKR0.69, and cut Elixir Securities Limited’s Jun-12 PT by 8.6% to PKR10.5.

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