Engro Polymer: Interest cost to keep bottom-line in red during 1HCY11

Engro Polymer: Interest cost to keep bottom-line in red during 1HCY11

Bottom-line to remain red in 1HCY11E: Engro Polymer & Chemicals Limited (EPCL) is due to announce its financial result for 2QCY11 on 5th August’11, where we expect the company to post LAT of PKR95mn (LPS: PKR0.14) for 2QCY11 from LAT of PKR269mn (LPS: PKR0.41) last year. This will translate into 1HCY11 LAT of PKR162mn (LPS: PKR0.24).

20% YoY ↑ in top-line & 670bps surge in gross margins: We anticipate top-line of the company to witness a surge of 20% YoY on the back of 16% higher PVC prices during 1H. Bottom-line shall get further support from rising gross margins which are expected to increase 670bps to 13% during 1HCY11 as we anticipate average PVC-Ethylene margins at USD565/ton, up 15% YoY.

High interest cost keeping bottom-line red, despite surge in operating profits: We expect financial charges for 1HCY11 to rise by 24% YoY to PKR802mn as the company has started to expense interest on its long term loans taken for expansion project post COD. While during 2QCY11, finance cost will likely witness an increase of 14% YoY to PKR420mn.

Investment perspective: At yesterday’s closing price of PKR9.2/share, the scrip trades at an expensive CY11E/CY12E P/E multiple of 8.2x/6.5x.

20% YoY ↑ in top-line & 670bps surge in gross margins

Net sales of EPCL is expected to post 20% surge on YoY basis to PKR8.1bn during 1HCY11, mainly on the back of 16% YoY rise in PVC, while PVC demand remained stable at 50k tons. Higher margins shall provide further support to bottom line due to increased reliance on cheaper in house VCM, post COD of the backward integration project. We estimate 2QCY11 PVC-Ethylene margins at USD600/ton taking average 1HCY11 PVC-Ethylene margins to USD565/ton, up 15% YoY, which shall prop up gross margins by 670bps to 13%.

High finance cost to more than offset high operating profits

Higher interest cost is expected to offset the gains from higher operating profits in 1HCY11 and bottom-line shall continue to remain in red. 1QCY11 balance sheet shows total debt of approximately PKR12.8bn, while we estimate finance cost to increase by 24% YoY to PKR802mn for 1HCY11 as the company has started expensing interest on long term loans taken for expansion project post COD. Similarly, during 2QCY11, finance cost will likely witness an increase of 14% YoY/10% QoQ to PKR420mn.

Investment perspective

Financial performance of the company is highly dependent on the performance of VCM plant as in house production of VCM is much cheaper than purchased product, yielding higher margins on in house VCM production. Currently, PVC-Ethylene margins are 3.4x PVC-VCM margins. At yesterday’s closing price of PKR9.2/share, the scrip trades at an expensive CY11E/CY12E P/E multiple of 8.2x /6.5x.

Economic & Political News

SBP injects PKR85bn to mitigate withdrawals

The State Bank of Pakistan (SBP) on Wednesday injected PKR85bn into the banking system for providing liquidity after huge withdrawals to avoid Zakat deductions.

New IMF programme as per Pakistan’s policies

IMF team was to visit Pakistan in July for the 5th Review under the Stand-By Arrangement but the failure of the economic managers to meet the revenue targets became the main reason behind the increased fiscal deficit which, in turn, made the Fund revisit its plan to visit Pakistan in order to restore the stalled programme worth USD3.2bn. The IMF has requested the government to provide actual figures of expenditure and revenue collected during 2010-11 in order to schedule post-budget review talks as slippages in targets have become the norm. Dates of the IMF visit are not finalised so far but it is now expected that the mission may visit the country in September and if Pakistan fails to convince the Fund, it is unlikely that the stalled SBA would be reactivated. This may compel the government to request another programmed of USD3.2-5bn.
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