DAWH: Return to profitability on higher profit from Associates & no impairment

1HCY10 bottom-line green again: DAWH recently announced its 1HCY10 financial result, where the company posted PAT of PKR1,305mn (EPS: PKR10.84), compared to LAT of PKR615mn (LPS: PKR5.11) in the same period last year. Net sales down 11% YoY; Strong margins maintained: Gross profit took a dip by 11% YoY to PKR1,218mn, primarily attributable to 11% YoY decline in net sales on the back of lower volumes. Gross margins on the other hand stood firm at 41%.

97% YoY ↑ in profit from Associate & no impairment loss triggered profitability: Share of profit from Associate (Engro) stood at PKR1,096mn, up 97% on YoY basis. Combined with that, absence of impairment charge (impairment expense of PKR1,536mn in 1HCY09) was the major reason behind improved bottom-line.

Investment theme: At PKR165.5, the scrip is trading at 18.5% discount to its portfolio value (PKR203/share) at current market prices; let aside core operations, indicating room for further price appreciation.

Net sales down on lower volumes; Margins remain intact

Lower production due to gas curtailment, effective from 26th April, 2010 resulted in 24% YoY reduction in Urea sales to 178kT. Consequently, net sales of the company registered a decline of 11% YoY to PKR2,936mn during 1HCY10. With margins intact at 41% (having only Urea in its product-line enables the company to enjoy healthy margins), gross profit for the period decreased by 11% to PKR1,218mn. However, core earnings of the company were recorded at PKR401mn (PKR3.33/share) in 1HCY10 down from PKR537mn (PKR4.47/share) last year.

97% YoY ↑ in profit from Associate & no impairment triggered earnings

During the period under review, Engro’s earnings increased by more than two folds to PKR3,197mn (consolidated), which led DAWH’s share of profit to increase by almost 97% YoY to PKR1,096mn (DAWH holds around 125mn shares (38%) of Engro). Unlike last year, where the company booked PKR1,536mn impairment loss on its ‘available for sale’ investment (SNGPL & SEPCO). The company didn’t book any impairment expense during 1HCY10, resulting in a green bottom-line.

Investment Perspective

At yesterday’s closing prices, current market value of the company’s portfolio is PKR203/share. Given the strong portfolio value and anticipated recovery in offtake during 2HCY10, the scrip appears to be fairly attractive at current levels of PKR165.5/share as the market is currently pricing DAWH at 18.5% discount to its total portfolio (let aside core operations) which indicates room for further price appreciation.

Economic & Political News

High credit risk, increased NPLs key challenges: SBP

The SBP has said that heightened credit risk and increased portfolio of NPLs would be key challenges for the banking system in the coming quarters as flash floods are likely to influence banks’ performance, according to the quarterly performance review of the banking system released by the central bank. The asset base of the banking system increased at 5.4% to PKR6,782bn against a contraction during the previous quarter, corresponding to the established industry pattern for the second quarter. The SBP attributed the increase in asset base to growth in deposits, mainly occurred in the balances of the banks, inter-bank lending, government papers and public sector commodity finance, while lending to the private sector came down and moderated the overall growth in loan portfolio. The NPLs grew by 0.6% to PKR460bn from PKR457bn during the 1QCY10. The profit-after-tax (PAT) of PKR36bn for the 1HCY10 remained higher than the corresponding period last year.

During the period under review, Engro’s earnings increased by more than two folds to PKR3,197mn (consolidated), which led DAWH’s share of profit to increase by almost 97% YoY to PKR1,096mn (DAWH holds around 125mn shares (38%) of Engro). Unlike last year, where the company booked PKR1,536mn impairment loss on its ‘available for sale’ investment (SNGPL & SEPCO). The company didn’t book any impairment expense during 1HCY10, resulting in a green bottom-line.

Investment Perspective

At yesterday’s closing prices, current market value of the company’s portfolio is PKR203/share. Given the strong portfolio value and anticipated recovery in offtake during 2HCY10, the scrip appears to be fairly attractive at current levels of PKR165.5/share as the market is currently pricing DAWH at 18.5% discount to its total portfolio (let aside core operations) which indicates room for further price appreciation.

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