EPCL and LOTHCEM Earnings Preview
KASB Views on the chemical Universe
KASB Chemical Universe is likely to witness a stellar quarter with cumulative profits of PkR4bn for 4QCY20. We forecast sector profits to shore up 2.4x on a Y/Y basis as a function of 1) better volumetric sales compared to the depressed base last year, 2) sharp recovery in primary margins and 3) lower financial charges. We eye the EBITDA margin of the coverage universe to improve by 351bps Q/Q (up ~13.42pps Y/Y) to 27.1%. These levels of EBITDA and profits for a quarter would be the highest for the coverage universe in the past 10 years.
– In the upcoming quarter results, Engro Polymer and Chemicals Limited (EPCL) is expected to see profits for the period at PkR3.2bn (EPS of PkR3.51). We see a sequential uptick in PVC volumes as well as a rally in regional PVC prices to dictate the topline primarily. We expect revenues for the quarter to reside at PkR13bn, up by 30% Y/Y. To note international PVC prices rose by 30% Q/Q and 33% on a Y/Y basis. On the cost front, 10% Y/Y higher ethylene rates and an increase in gas prices compared to last year are likely to lead the cost of sales to PkR7.9bn. Consequently, we anticipate the gross profits to stand at PkR5bn, up by 2.6x on a Y/Y basis. We see a 29% Y/Y decline in finance costs from lower borrowing costs. The company may record other income at PkR263mn. Overall we see CY20 close with earnings of PkR5.8/sh. The result is likely to be accompanied by a final cash dividend of PkR0.8/sh.
– We expect Lotte Chemicals Pakistan Limited (LOTCHEM) to record earnings of PkR0.51/sh for 4QCY20 taking CY20 earnings to PkR1.2/sh. We see the company record PkR10.9bn (down by 16% Y/Y) from PTA sales of ~130k tons. We see lower retention rates for the period as International PTA prices averaged at USD458/ ton for the quarter down by 27% Y/Y. Paraxylene rates are down by 31% Y/Y for the period. Cost of sales consequently is projected to fall by 18% Y/Y in turn leaving gross profits of PkR1.1bn with margins residing at 10.3%. Despite a heftier cash balance, the other income for LOTCHEM is expected to drop by 34% Y/Y to PkR281mn owing to lower interest rates. Overall, the company is expected to witness a muted quarter as Profit after Tax resides at PkR778mn as compared to PkR808mn last year, down by 4% Y/Y. We expect a dividend of PkR0.5/sh along with the results.
– We remain cognizant of volatile PTA-PX margins that currently dictate much of the profitability for LOTCHEM. We have a liking for EPCL as multiple positives from upcoming PVC expansion, healthy margins and recovery in downstream demand are yet to be priced in. The scrip offers an upside of 30% from last close and trades at a P/E of 6.0x.