Karachi, July 22, 2022 (PPI-OT): Engro Polymer and Chemicals: Bumpy ride ahead

We reinstate coverage on Engro Polymer and Chemicals (EPCL), the sole producer of PVC in Pakistan, with a “Sell” stance and Dec-2022 Target Price of Rs55. With a downside of 15%, we believe positives are priced in, while strong headwinds lie ahead.

Key variable underpinning our thesis is the ongoing normalization of PVC ethylene core delta, where we build in incrementally receding core delta over CY22-24E. Our base case factors in US$600, US$500 and US$400/ton core delta in CY22, CY23E and CY24E respectively and US$400/ton beyond that.

Our investment case is also negatively impacted by (1) expected increase in the gas prices, (2) sharp increase in finance cost due to monetary tightening and (3) imposition of one-time and recurring super tax. On the flip side, PKR depreciation may provide near term cushion.

We expect earnings to bottom-out in CY24 (P/E: 6.72x 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, increase in protection to local players through higher import duties and higher payout ratio beyond CY22E.