Dear Clients,

Engro Polymer and Chemical Limited (EPCL) announced its 4Q2020 results reporting profitability at PkR3.7bn (EPS of PkR4.03/sh), up by 4.2x Y/Y and 2x Q/Q, outperforming our expectation of PkR3.5/sh as well as street consensus.

– The result deviates from our estimates largely on account of lower cost of sales reported. We believe the company recorded a healthier than expected primary delta likely from ample ethylene availability at lower rates.

– Along with the result, EPCL announced final cash dividends of PkR1.247/sh.

– On a cumulative basis, however, the company saw a 7% Y/Y drop in revenues.  Earnings for CY2020 stood at PkR5.7bn as compared to PkR3.7bn reported in CY2019.

– During 4Q2020, EPCL reported increase in revenues to PkR2.4bn, up by 24% Y/Y as a function of healthier PVC prices. On a sequential basis, the company saw a 23% Q/Q rise in revenues. We believe this was further supported with better PVC sales compared to trailing 3 quarters.

– On the cost front, an 11% Y/Y rise in raw material ethylene rates went unnoticed as COGs declined by 4% Q/Q and 17% Y/Y during 4QCY20. We believe the company has utilized ethylene procured at cheaper rates that explains the phenomena.

– Resultantly, gross profits surged by 184% Y/Y and 81% Q/Q to PkR5.8bn during the quarter translating to gross margins of 47%, up by 26.4pps Y/Y.

– Administrative and selling expenses cumulatively stood lower by 18% Y/Y. Moreover, other income improved to PkR247mn, up by 28% Y/Y.

– Low-interest rates brought tamer finance cost that stood at PkR370mn lower by 38% Y/Y and 18% Q/Q.

– Overall the company saw its strongest bottom-line during the quarter at PkR3.7bn, up by 4.2x Y/Y and 2x Q/Q sequentially translating to EPS of PkR4.03/sh taking CY2020 earnings to PkR5.7bn (EPS: PkR6.28/sh).

– Going forward, we see positives emanating from upcoming PVC line expansion to deliver a robust bottom-line for the company despite expected attrition in primary delta. We see multiple positives from expansion of the company into H2O2 line and improved economic activity along with low interest rates. We have an Outperform stance on the scrip with TP of PkR62/sh.

Regards,
KASB Research