Morning Call about HOLD – Arif Habib Limited
Karachi: Low margins are likely to drag profitability in CY12
The Best in terms of margin is behind us
After enjoying a buoyant cycle since CY09, PTA margins are trading close to their historic lows of USD 84/ton (Jan-12 average of USD 97/ton).
According to Arif Habib Limited fears that the business cycle has reversed for the PTA industry and the best in terms of margin is behind us. Arif Habib Limited’s pessimism mainly emanates from the aggressive PTA capacity expansion in the region, which is comprehensively outpacing the supply addition of Paraxylene (Px), the major raw material for PTA. As per ICIS, Asian PTA capacity will increase by 14.5mn tons during CY11-13 as compared to 7mn tons of Px addition. Besides this PTA over supply situation, slow down in textile exports from China due to EU debt crisis and subdued economic growth in US is also painting a gloomy picture on the margin outlook.
CY12 could be the worst year for margins
Arif Habib Limited is of the view that CY12 will be another difficult year for PTA manufacturers as both the PTA capacity additions and economic woes in EU and US are likely to keep margins under pressure. Around 7.5mn tons of new PTA would be added in the Asian market during CY12 for which hardly 1mn tons of new Px would be available. This is likely to keep Px scarce, thus forcing its price upward. Price of PTA on the other hand is likely to remain under pressure due to slow down in demand from the downstream polyester sector. An intensifying EU debt crisis and subdued economic growth in US is likely to keep Chinese exports in check. Arif Habib Limited has revised Arif Habib Limited’s CY12 margin assumption down to USD 136/ton from 160/ton, consequently Arif Habib Limited expects LOTPTA, to post a CY12 EPS of PKR 1.90/ton.
A 34.5% QoQ decline in margins may reduce EPS to PKR 0.16 in 4QCY11
Arif Habib Limited expects Lotte Pakistan PTA Limited (LOTPTA) to post profit after tax (PAT) of PKR 279mn (EPS: PKR 0.18), a 68.6% QoQ decline, when compared with PAT of PKR 889mn (EPS: PKR 0.59) in 3QCY11. This massive decline in profitability is expected on account of a 34.5% QoQ drop in average PTA margin, which have dropped to USD 126/ton in 4QCY11 from USD 193/ton in 3QCY11. For CY11, Arif Habib Limited expects the company to earn PAT of PKR 4,867mn (EPS: PKR 3.21) as compared to PKR 4,528nm (EPS: PKR 2.99) in CY10, projecting a YoY improvement of 7.5%.
Trading at a premium to market multiple
At current price level the stock is trading at CY12F PER of 7.5x, which is at a premium to the market multiple of 5.8x. Arif Habib Limited believes that the market is yet to incorporate the effect of this high premium, and coupled with low expected margins in CY12, the stock is likely to underperform the Index going forward.