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AKD Quotidian about — EPCL – Upgrade to BUY on stable VCM operations

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by April 9, 2013 Brokerage

Karachi, April 09, 2013 (PPI-OT): EPCL managed to barely breakeven in CY12 (NPAT of PkR77mn) compared to a NLAT of PkRlQ6mn (LPS: PkR1.06) in Cvii.

According to AKD Securities factors contributing to the recovery in earnings were underscored by a 51%YoY increase in EBITDA to PKR3.lbn and insurance claim of PkR423mn (EPS impact of PkRO.41). AKD Securities has raised AKD Securities EPS estimates for EPCL by an average of 98% across the next three years following increase in AKD Securities PVC plant capacity utilization assumption by 5pps to 95%, as well as AKD Securities caustics soda price assumption following an estimated 23%YoY rise in realized caustic soda prices in CY12. Following the revision in AKD Securities earnings estimates, AKD Securities has upgraded AKD Securities Dec’13 TP from PkRI1.6/share to PKR17.1/share and recommend `BUY’ at current levels.

CY12 Result Review: EPCL managed to barely breakeven in CY12 (NPAT of PkR77mn) compared to a NLAT of PkR7O6mri (LPS: PkR1 .06) in Cvii. Factors contributing to the recovery in earnings were underscored by a 51%YoY increase in EBITDA to PKR3.lbn and insurance claim of PkR423mn (EPS impact of PkRO.41). At the operating level, key highlight was the increase in VCM production where EPCL produced 146k tons compared with 98k tons in CY11, curtailing VCM imports to just 13k tons compared with 24k tons last year.

Similarly, PVC production also increased to an all-time high of 146k tons (+20%YoY), while sales clocked in at 146k tons (+18%Y0Y), driving PVC segment profitability to PkRb8Ornn, despite sharp fall in global PVC-Ethylene Primary Margins (PMs), which were down by 20%YoY to -US$390/ton. Caustic Soda segment also recorded an impressive operating profitability growth of 49%YoY to PkRl784mn following 10%YoY growth in product sales as well as higher product prices. Sharp depreciation of the PkR (down by 8%YoY against US$) during Cvi 2 resulted in total currency exchange losses of PkR789mri (+95%YoY), which was a drag on CY12 profitability.

Raising AKD Securities utilizations assumption: AKD Securities has raised AKD Securities EPS estimates for EPCL by an average of 98% across the next three years following increase in AKD Securities PVC plant capacity utilization assumption by Spps to 95%, where AKD Securities capacities utilization assumption has been increased after taking into account the impressive run of the VCM plant in CY1 2. Similarly AKD Securities has also increased AKD Securities caustics soda price assumption following an estimated 23%YoY rise in realized caustic soda prices in CY12.

Recommendation: Following the revision in AKD Securities earnings estimates, AKD Securities has upgraded AKD Securities Dec’13 TP from PkR1 1.6/share to PKRI7.1/share and recommend `BUY’ at current levels. Given the apparent recovery in the construction sector as well as improving farmer economics, demand fundamentals for PVC pipes remain strong. Furthermore, the rebound in textile sector is expected to support caustic soda demand going forward.

While the PVC plant operated at 97% in CYI2, AKD Securities has taken a slightly conservative view and have assumed a utilization level of 95% going forward, where better than expected utilization level is a key upside risk to AKD Securities estimates. Furthermore, with the sluggish recovery in global economy coupled with new capacities of ethylene is likely to pose an upside risk to AKD Securities PVC-Ethylene PM assumption. Lastly, the company is also considering a debottlenecking exercise, which could increase PVC capacity by 30k tpa (20% of current capacity) which could also be a trigger for EPCL. Unstable production at the VCM plant, currency volatility as well as weakening of the PVC-Ethylene margins are key downside risks to AKD Securities calls.

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