LOTCHEM 2QCY19 earnings meets expectations
Lotte Chemical Pakistan Ltd (LOTCHEM) announced its earnings for 2QCY19 that stood at PKR1.8bn (EPS: PKR1.17) up 37% QoQ and 2.3x YoY.
The latest earnings print stood in line with our expectations (BMA’s estimate: PKR1.2/sh), where handsome revenues, better currency translation gains, and higher income on cash balance helped deliver 1HCY19 earnings at PKR2.01/sh.
The topline of the company saw 6% QoQ improvement sequentially despite lower PTA rates internationally from better than expected currency gains (PKR depreciated by 6% on average during the quarter) while volumes remained supportive.
On the other hand, notable drop in PX prices helped support gross margins for the quarter that stood at 15.2%, up by 358bps sequentially. Gross profit for the company stood at PKR2.6bn, up 38/52% QoQ/YoY. To note, reported margins for the quarter are the second highest margins reported in the past 12 quarters.
Furthermore, modest rise in admin and selling expenses and absence of significant exchange losses helped propel bottom line to PKR1.8bn, up by 37/78% QoQ/YoY, for the quarter.
Going forward, ample margins and favorable currency movement are expected to help deliver earnings. We have a BUY stance on LOTCHEM currently trading at a P/E of 5.4x.
Key risks to our thesis include: (i) Above expected jump in gas costs used for power generation, (ii) volatility in PTA-PX margins, (iii) adverse changes in duty structure, and (iv) minimum turnover tax of 1.25% that results in increased earnings volatility in case of low profitability.
Lotte Chemical Pakistan Limited (LCPL) is a Pakistan-based manufacturer and supplier of Purified Terephthalic Acid (PTA). The Company has the capacity to produce approximately 500,000 tons of PTA per year through its plant located at Port Qasim, Karachi. It operates in the manufacture and sale of chemicals segment. The Company is a supplier for the domestic polyester and polyethylene terephthalate (PET) industries. For producing PTA, it imports its feedstock (Paraxylene) from suppliers based in Asia and Middle-East region. PTA is the primary raw material for producing polyester fiber, polyester filament yarn, polyester film and PET.
BMA is amongst the leading financial groups in Pakistan. BMA Capital’s core areas of business include Capital Markets, Corporate Finance & Advisory, Asset Management, and Financial Products Distribution. BMA Capital is the leader in privatisation advisory in Pakistan, having successfully advised on over 50% of all privatisations in Pakistan, by value, in transactions valued in excess of US$4 billion. Recent transactions include joint lead managing the $813 million GDR Offering of 10% of OGDCL on the London Stock Exchange in 2006-07, and advising Etisalat on their successful acquisition of a 26% strategic stake in Pakistan Telecommunications Company Limited (PTCL) for US$2.6 billion, the largest M&A transaction and foreign direct investment in Pakistan’s history. The firm is among the top brokers in the Pakistan equity and treasury markets, and is among a handful of firms that comprehensively cover all segments of the capital markets. This is supported by a very strong and independent research capability, which is quoted regularly in both local and international media. BMA Capital’s retail brokerage brand, BMA Trade, has launched a nationwide network of branches as well as a comprehensive online trading platform, enabling investors across Pakistan to take part in the capital markets.
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