EPCL - Analyst Briefing Takeaways
Engro Polymer and Chemicals Ltd (EPCL) held its analyst briefing to discuss the CY19 results and outlook of the company. To recall, earnings for the year stood at PKR3.7bn (EPS: PKR4.07) as compared to PKR4.9bn (EPS: PKR5.42). Key takeaways are as follows:
The company saw volumes tread lower for the PVC and Caustic Soda segment in line with macro slowdown, weak demand from lower development spend and regulatory impediments. PVC sales stood at 191k tons (down 6% YoY) and caustic soda sales stood at 83k tons (down 3% YoY).
The company is exploring other applications for PVC such as rigid sheets and PVC profiles as a possible avenue to mitigate volumetric decline. However, both demand avenues remain small to bridge the drop.
On the cost front, gas prices attributed to cost increment during the year. Natural gas remains the preferred source of power generation for the company despite the uptick.
Despite healthy primary delta during the year, the company saw flattish profitability (adjusted for one offs) for CY19. Primary reason among others was the elevated freight cost incurred on ethylene imports. Import regions vary from USA to the Far East depending on favourable pricing thereby freight charges vary between USD80-120/ton.
The announced expansion project of PVC-3 remains on track for completion by the end of the year. Moreover, the company is progressing well on the hydrogen peroxide facility.
The management eyes LABSA Greenfield project as an avenue for diversification with 24k tons of capacity. The market for LABSA stands at 110k tons growing at 14% YoY. The management believes it can capture the growth space.
For CY20, PVC and caustic soda markets remain challenging. In terms of volumes the management does not eye volumetric growth in the near future.
We believe the profitability of PVC segment should come under strain given supply chain challenges as well as lower demand for products. Potential downgrade in primary delta towards historic average is likely to further restrict profits with gas price hike to prove to be a cherry on the top. Our earnings projection of PKR3.5bn (EPS: PKR3.89) for CY20 carries downside risk. We await release of detailed accounts to revisit our investment case. We have a neutral stance on the scrip.
Engro Polymer & Chemicals Limited is a chlor vinyl chemical company. The principal activity of the Company is to produce and market chlor-vinyl products, which include poly vinyl chloride (PVC), vinyl chloride monomer (VCM), caustic soda, hydrochloric acid and sodium hypochlorite. The Company operates through three segments: poly vinyl chloride (PVC) and allied chemicals, caustic soda and allied chemicals, and power supplies. The poly vinyl chloride (PVC) and allied chemicals segment manufactures and sells PVC and allied chemicals to various industrial customers, including pipe manufacturers, shoe and packaging industry. The caustic soda and allied chemicals segment manufactures and sells caustic soda and allied chemicals to textile and soap industry. The power supplies segment supplies surplus power generated from its power plants to Engro Fertilizers Limited. The Company manufactures and markets over four grades of PVC under the brand name SABZ.
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