Karachi, October 04, 2012 (PPI-OT): The two petchem plays in the AKD Universe, LOTPTA and EPCL, have underperformed the KSE-100 as weakening fundamentals have marred price performance.
According to AKD Securities going forward, fortunes of the sector will be closely aligned to economic growth in China where recent economic data suggests slowdown in manufacturing growth (manufacturing PMI reading for Sep’12 came in at 49.8, score <50 indicates contraction), with moderate growth going forward being the new normal. Resultantly, prices in the petchem chain are likely to remain under pressure. On a company wise basis, AKD Securities expects the next year to be tougher for LOTPTA as the PTA-Px spread is likely to hover in the US$100-US$125 per ton range, markedly lower than the +US$300/ton range during CY10-CY11. EPCL will be better positioned to counter the downtrend in petchem prices, primarily due to its diversified product line.
LOTPTA outlook: AKD Securities has downward revised AKD Securities’ EPS estimates for LOTPTA in the range of 50%-70% for CY13F-CY14F after reducing AKD Securities’ PTA-Px PM assumption by US$25/ton for the next two years to US$125/ton and US$150/ton, respectively, as weakness will persist on shortage of Px where regional expansions will trail PTA expansions, as well as lower cotton prices. Estimates for CY12 have also been lowered after incorporating the 2QCY12 result (which came in below-line) as well as persistent weakness in PTA-Px margins. AKD Securities now expects the company to post a NLAT of PKR 132 million (LPS: PKR 0.09) in CY12. For 3QCY12, AKD Securities forecasts the company to post a second consecutive loss of PKR 98 million (LPS: PKR 0.06) where lower PMs (-20%QoQ) would pull down margins, although a stable PKR would shield the company from fx translation losses. AKD Securities has also reduced AKD Securities’ target price by 12% to PKR 7.4/share and at current levels recommend Neutral stance on the scrip. Near term trigger would be a discount rate cut where a 1% reduction in CoE will bump up AKD Securities’ target price by 9%. Rise in PTA import duty (currently at 3%) is the key upside risk to AKD Securities’ call.
EPCL outlook: Compared to LOTPTA, AKD Securities believes that EPCL is better positioned to weather the downturn in petchem prices given its diversified product line. Of particular mention would be the Caustic Soda business, where segment profitability during 1HCY12 was up 52%YoY to PKR 780 million, nearly double the profit of the PVC division (operating profit of PKR 413 million in 1HCY12). Going forward, AKD Securities expects PVC-Ethylene margins to remain stable where demand slowdown (moderate pace of housing construction growth in China) in PVC will be countered by lower ethylene prices. For 3QCY12, AKD Securities expects the EPCL to bounce back into profit and post NPAT of PKR 70 million (EPS: PKR 0.11) on better offtake as well a stable currency. Stable production at the company’s VCM plant will improve product availability, while the company may be able to export some excess VCM during the quater. However, AKD Securities has pared AKD Securities’ full-year CY12 NPAT estimates by 33% to PKR 219 million (EPS: PKR 0.33) after taking into account the weak set of 2QCY12 results. Near term trigger for EPCL is the interest rate cut where a 1% cut in interest rate would increase AKD Securities’ CY13F and CY14F PS estimates by 20% and 10%, respectively. At current levels, AKD Securities recommends Neutral stance on EPCL with a target price of PKR 102/share, However, incorporating a 1% cut in risk free rate would increase AKD Securities’ target price by 15%.