KASB Chemical Universe
EPCL and LOTHCEM Earnings Preview
KASB Chemical Universe is expected to report PkR6.4bn in profits cumulatively for 1QCY21. Our forecast of sector profits sees the quarter earnings go up by 36% Q/Q as a function of 1) steady rise in volumetric sales, 2) soaring petrochemical primary margins and 3) lower financial charges. Our estimates pin the EBITDA margin of the coverage universe to improve by 60bps Q/Q (up ~26.7pps Y/Y) to 34%. These levels of EBITDA and profits for a quarter would be the highest for the coverage universe in the past 10 years.
– We forecast Engro Polymer and Chemicals Limited (EPCL) to post profits for the period at PkR4.8bn (EPS of PkR5.26) for 1QCY21, up by 29x Y/Y. PVC prices in the region have increased by 19% Q/Q during the period leading primary margins to USD840/ton up by 21% compared to the same period last year. We expect revenues to reside at PkR14.6bn for the quarter on the back of an uptick in PVC volumes owing to new line commissioning as well as better pricing. On the cost front, 41% Y/Y and 14% Q/Q higher ethylene rates are likely to lead the cost of sales to PkR7.5bn. Consequently, we anticipate the gross profits and gross margins to stand at PkR7.2bn and 49% respectively. We see a 49% Y/Y decline in finance costs from lower borrowing costs. The company may record other income at PkR0.3bn. Overall profitability is likely to stand at PkR4.8bn with EBITDA projected at PkR7.4bn for the quarter.
– We expect Lotte Chemicals Pakistan Limited (LOTCHEM) to record earnings of PkR1.09/sh for 1QCY21, up by 51% Q/Q. We see the revenues for the quarter at PkR15bn (up by 32% Y/Y) from PTA sales of ~130k tons. We see better retention rates for the period as International PTA prices averaged at USD635/ ton for the quarter up by 34% Y/Y. Paraxylene rates are up as well by 33% Y/Y for the period. As a consequence, PTA-PX primary margins are Cost of sales consequently is projected to rise by 7% Y/Y. This is likely to result in gross profits of PkR2.4bn with margins residing at 15.9%. Despite a heftier cash balance, the other income for LOTCHEM is expected to drop by 14% Y/Y to PkR296mn owing to lower interest rates. Overall, the company is expected to witness a strong start to the quarter as Profit after Tax is expected to reside at PkR1.6bn as compared to PkR59mn last year.
– Our forecast for primary margins and product pricing has been surpassed at a rapid pace as commodity markets in the region have seen limited supplies and raw material abundance. That said, our estimates are likely to see an upside on these sustained levels of margins going ahead. We have a liking for EPCL as multiple positives from PVC expansion, healthy margins, and recovery in downstream demand are yet to be priced in. The scrip offers an upside of 11% from last close and trades at a P/E of 7.0x.