Karachi: EPCL managed to pare loses in 9MCY11 where the company’s NLAT reduced by 70%YoY to PkR228mn (LPS: PkR0.66) following improvement in gross margins due to higher VCM production and better PVC-VCM primary margins.
According to AKD Securities, following repair work at Furnaces A & B in 3QCY11, the VCM plant operated at 100% capacity in Oct’11. producing 13.3ktons of VCM. Earnings of EPCL are highly sensitive to VCM imports where AKD Securities estimates a 5k tons reduction in VCM imports to lead to an EPS improvement of –PkR0.30. That said, weak PVC prices in addition to strong possibility of a rights issue with the year end results is likely to negate the positives coming from stable VCM operations and AKD Securities recommends Hold on EPCL with a target price of PkR8.90/share.
9MCYII Result Review: EPCL managed to pare loses in GMCY11 where the company’s NLAT reduced by 70%YoY to PkR228mn (LPS: PkRO.66). A 6ppt YoY improvement in gross margins was the major factor behind the reduction in losses, levering up gross profits by 129%YoY to PkR1,461 mn. Improvement in VCM production (-i-58%YoY to 57k tons) coupled with higher PVC-VCM margins (+44%YoY to US$398/ton) were the GM drivers during 9MCY11. 3QCY11 results were disappointing where EPCL’s NLAT expanded by8O%QoQ to PkR245mn (LPS: PkRO.37). Major factors dragging 3QCY11 profits were) Lower GMs (-2pptQoQ to 11%) due to a 1 5%QoQ contraction in PVC-VCM margins to US$351/ton, ii) 1O%QoQ rise in financial charges and iii) foreign exchange loss of PkR1 24mn due to a relatively volatile Pak Rupee which lead to Other Expenses hiking by 112%QoQ to PkR127mn.
VCM Plant operated at impressive load factor in Oct11: As has been mentioned before, VCM plant has been the Achilles Heel for EPCL. The company has struggled to maintain stable operations at the VCM plant, which has resulted in cost over runs, reduced PVC production and a high opportunity cost as EPCL has been unable to take full advantage of the record high PVC- Ethylene spreads. However, following repair work at Furnaces A&B in 3QCY11, the VCM plant operated at 100% capacity in Oct’11, producing 13.3ktons of VCM. Earnings of EPCL are highly sensitive to VCM imports where AKD Securities estimates a 5k tons reduction in VCM imports to lead to an EPS improvement of -PkRO.30.
Stable VCM to shore up earnings at time of falling PVC prices: Achieving stability n VCM production is on one hand a welcome relief for investors, however AKD Securities feels that the stability has come a little too late for EPCL as t has clearly missed out on the record high PVC-Ethylene primary margins. Region at PVC prices have come down from recent highs of US$1,220/ton in June’11 to currently US$870/ton while at the same time fall in ethylene prices has been less dramatic (Us$1,200 in Jun’11 to US$1,005/ton currently). On the domestic front, PVC prices remained downward sticky in 3QCY11, however AKD Securities expects a significant downward revision in prices in Nov’11 as PVC importers have already reduced their prices and CPCL should also follow suit.
Recommendation – Hold: After incorporating 3QCY11 results into AKD Securities’ model, AKD Securities has reduced AKD Securities’ target price by 5% to PkR8.90/share, where AKD Securities sees limited upside from current levels and recommend Hold on the scrip. Weak PVC prices in addition to strong possibility of a rights issue with the year end results is likely to negate the positives coming from stable VCM operations.