Karachi, August 12, 2022 (PPI-OT): EPCL: 2QCY22 in line with expectations; Maintain ‘Sell’
Engro Polymer and Chemicals Limited (EPCL) posted 2QCY22 EPS of Rs2.45, down 26% YoY and 50% QoQ, taking 1HCY22 EPS to Rs7.56, -5% YoY. The company also announced DPS of Rs2.5, taking 1HCY22 DPS to Rs7.5.
Despite stable margins, profitability declined due to foreign exchange losses and increase in finance and tax charges (including one-time 10% Super tax). In its corporate briefing held yesterday, management apprised that it expects core delta to find support post monsoon season and relaxation of COVID-19 restrictions.
We maintain ‘Sell’ on EPCL with a TP of Rs55 as we expect margins to remain under pressure in 2HCY22. Higher gas prices (Cabinet approval awaited) and higher finance cost due to sharp monetary tightening will add to woes. The stock responded positively to record PKR depreciation in Jul-22 but recent PKR appreciation, if sustained, could unwind some of the gains.
Super tax and FX losses dented profitability
Engro Polymer and Chemicals Limited (EPCL) posted 2QCY22 results yesterday where the company witnessed a profitability decline of 26%/50% on YoY/QoQ basis. Profit after tax came in at Rs2,339mn translating into an EPS of Rs2.45 for 2QCY22 (1HCY22 EPS: 7.56, -5% YoY). Along with this, the company also paid-out DPS of Rs2.5, taking 1HCY22 DPS to Rs7.50.
On QoQ basis, top-line of the company declined by 4% mainly on account of lower volumes (58.1 KT in 2QCY22 compared to 62.5KT in 1QCY22). On the other hand, despite decline in PVC ethylene core delta (2QCY22: US$784/ton, -5% QoQ) PKR/US$ depreciation supported gross margins. Overall, profitability declined on account of higher other expenses (FX losses), increased financial charges and imposition of 10% of Super Tax.
Strong headwinds ahead
Post outbreak of COVID 19, PVC-Ethylene core delta witnessed a sharp increase, touching US$1,173/ton (Oct’21) from US$439/ton (Nov’19). This has been led by both, strong global PVC demand and weak supply side dynamics. Nonetheless, core delta has dropped 56% since its peak to US$ 517/ ton (5th Aug’ 22) as per Bloomberg. Core delta for 3Q averages to US$584/ton so far, against our estimate of US$650/ton.
It is pertinent to note that PVC prices have witnessed a decline of 24% since Jun’22 against 13% drop in ethylene prices during the same period. Recent decline in core delta was witnessed on account of slowdown in China and India due to monsoon season.
Management highlights headwinds
In its corporate briefing held yesterday, the company shared their views / assessment of the prevailing environment and progress on key projects:
Management expects PVC and Ethylene prices to stabilize post monsoon season and relaxation of COVID-19 restrictions, providing some support to core delta.
Recent macroeconomic headwinds have increased uncertainty for the business environment going forward.
Sharp currency devaluation and rising interest rates amid inflationary pressure may lead to slowdown in domestic demand.
Higher fuel prices and tight global RLNG market may pose challenge to availability of gas towards the end of 2022 which is a key input.
The management also updated regarding basic engineering study for debottlenecking of VCM production facility currently underway, while HTDC and Hydrogen peroxide projects are expected to come online next year.
Valuation
We maintain a ‘Sell’ on the stock with a TP of Rs55. We expect earnings to bottom-out in CY24 (P/E: 7x vs JS Universe CY24 PE of sub 4.0x), taking our 3-year CAGR from CY21-CY24F to negative 16%. Upsides to our investment thesis stem from lower-than-expected decline in core delta, higher than expected PKR/US$ depreciation and higher pay-out ratio beyond CY22E. For more details, please refer to our detailed report ‘Engro Polymer and Chemicals: Bumpy ride ahead’, released last month.