Pakistan Chemicals Earnings Preview January 14, 2015 ICI Pakistan Ltd 2Q Preview: Higher PSF margins to lift earnings but headwinds remain Morning Shout Higher PSF margins to lift earnings in 2Q Muhammad Saad Ali [email protected] +92 21 111 222 000 We expect ICI Pakistan Ltd (ICI) to post a PAT of PRs613mn (EPS of PRs6.64) in 2QFY15, which will be up 74% QoQ and 34% YoY, led by higher PSF margins during the quarter. This will take 1H earnings to PRs10.46/sh, up 26% YoY. Earnings in 2Q will be further bolstered by robust sales growth in soda ash and Life Sciences segments. We opine that higher PSF margins, led by lower feedstock prices, will not sustain going forward; as prices have slid 12% in Jan-15. Despite the commissioning of coal-fired boilers on soda ash and PSF plants, we believe severe gas outages would raise energy costs. We reiterate our Underperform rating on ICI with a PO of PRs500 as we think valuations (FY15E P/E of 20x; EV/EBITDA 9x) reflect the positives but risks to earnings from weak PSF dynamics have not abated. Current Price Price Objective PRs512.90 PRs500.00 Reuters Bloomberg Shares outstanding Market Cap 12M High / Low 3M Average Daily Vol. ICI.KA ICI.PA 92.36mn USD470.84mn 597.56/264.74 37,669 shares Robust sales growth but higher energy costs We expect ICI’s sales to rise 6% QoQ to PRs9.9bn on higher volumetric growth across most segments, but partly masked by lower PSF prices. EBITDA margins in 2Q are expected to clock in 300bp QoQ growth to 10% on the back of higher PSF margins. Following are our expectations for the segment-wise performances: PSF: We expect the segment to breakeven in 2Q on the back of 13% lower feedstock prices, while local PSF prices were down only 6% QoQ. Despite poor margins, the PSF plant has been operating near full capacity. Soda Ash: Post commissioning of coal-fired boilers in 3QFY14, the soda ash segment has been operating at about 10% higher capacity utilization, backed by greater local demand (increased glass production) and rising exports to India. Increased gas outages, however, are expected to trim margins somewhat. ICI: Valuation Snapshot Revenue % change PAT FY14A FY15E FY16E 38,233 41,437 46,497 5% 8% 12% 1,702 2,388 3,496 % change 47% 40% 46% EPS (PRs) 18.43 25.85 37.86 PER (x) 27.83 19.84 13.55 8.00 12.00 15.00 2% 2% 3% DPS (PRs) D/Y (%) P/B (x) 4.22 3.73 3.17 ROE (%) 15% 19% 23% 10.13 8.49 7.95 EV/EBITDA Source: KASB Research Life Sciences: Sales is this segment has continued to impress, rising about 20% YoY in the previous few quarters; we expect the trend to persist in 2QFY15 as well. New product offerings in seeds pharmaceutical businesses are attributed for this growth. Chemicals: We expect sales to decline from previous quarter due to seasonal factors. Retain Underperform on expected reversion of PSF margins Despite the earnings growth expected in 2QFY15, we retain our Underperform rating as valuations have more than priced in the turnaround story but do not reflect the potential risks, in our view. Going forward, we see two risks to earnings growth: (1) fall in PSF margins, and (2) higher-than-expected gas tariff hike. We expect PSF margins, albeit steady in 2Q, to decline going forward as prices have slid 12% in Jan-15 to reflect feedstock prices. In our view, unless NTC imposes anti-dumping duty on PSF imports from China (which have taken over about 25% of the market), the situation is likely to persist as the industry lacks pricing power. As for the gas tariff hike, we expect a 10% increase to trim ICI’s earnings by 7% as both PSF and soda ash are still partly dependent on gas for its energy requirement. We await clarity on the potential size and profit contribution of new projects (Morinaga infant milk and Nutraceuticals) to revise our estimates. KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB, as a full-service firm, has or may have business relationships, including investment-banking relationships, with the companies in this report. Page 1 ICI Pakistan Ltd – January 14, 2015 Morning News KSE-100 Intra-day Movement FIPI 33,400 Engro Fertilizers converts IFC loan into equity (DAWN/Analyst Comment): As per a notice of Engro Fertilizer Ltd (ERERT), the International Finance Corporation (IFC) has exercised its option to convert part of its convertible loan, amounting to US$3mn into shares of the company. Just to recall, the initial convertible loan was US$9mn out of which the company had earlier converted a total of US$5mn into EFERT’s equity. As per the terms agreed with IFC, the company would soon issue 12.59mn shares to IFC, at an option price of PRs24 per share, totaling PRs302.17mn. This is expected to result in a 1% dilution in EFERT’s earnings. Meanwhile, company’s free float will increase by 1% through this conversion. High 33,360 33,320 33,280 33,240 33,200 33,160 Low 33,167 9:30 AM 10:56 AM 12:21 PM 1:45 PM 3:10 PM No extension in accord with K-Electric (Tribune): The Minister of State for Water and Power, Abid Sher Ali has declared that the government will not extend the existing power purchase agreement of 650MW with K-Electric as the prime minister has called for a review of the arrangement and engaging in consultations with the Sindh government. Source: KASB Research Index Data & Volume Leaders Close KSE30 KSE100 KSE All Share ENGRO EFOODS EFERT MLCF PSO Vol. US$ mn % Chg 21,587.14 33,371.29 -0.3% -0.1% 62.34 93.00 24,251.60 243.13 128.73 76.54 47.94 346.21 -0.3% -0.9% 4.2% -3.1% 1.0% -2.2% 131.32 13.50 9.48 5.30 4.87 4.75 Technical View Ahmed Hanif [email protected] KSE-100: Cements & IPPs looking most attractive The index opened negative and remained bearish during the entire trading session yesterday but recovered its losses in the second half of the session, closing slightly in the red. Overall formation of the index remains bullish as it is trading above 32,315, which is the high of the last rally and it could target 33,800-34,000 area – the upper daily Bollinger band. The cement sector (ACPL, FCCL, MLCF and DGKC) and IPPs (HUBC and KAPCO) are looking attractive at current levels, and they may lead the index towards new highs. It is recommended to accumulate trading positions on weakness with risk defined below 32,000. Source: KSE KSE-100: Top Gainers & Losers FIPI PCAL DAWH ISL PAKRI AHCL SRVI PPL EFUL OGDC EFERT -4% -2% 0% 2% 4% 6% Source: KASB Research Page 2 ICI Pakistan Ltd – January 14, 2015 World Markets and Commodity Prices International Equity Markets Asian Markets (Last trading session’s) European Markets (Last Trading Session’s Rates) Price All Ordinaries Shanghai Composite Hang Seng BSE 30 Jakarta Composite KLSE Composite Nikkei 225 NZSE 50 Straits Times Seoul Composite Taiwan Weighted KSE-100 Index Abs. Chg. 5,382.10 3,247.35 24,215.97 27,425.73 5,214.36 1,748.90 17,087.71 5,636.61 3,341.07 1,917.14 9,231.80 33,371.29 -17.4 18.0 189.5 -159.5 26.4 13.8 -110.0 26.8 -3.8 -3.8 53.5 -46.9 % Chg. -0.32 0.56 0.79 -0.58 0.51 0.80 -0.64 0.48 -0.11 -0.20 0.58 -0.14 Price ATX BEL-20 CAC 40 DAX AEX General Swiss Market FTSE 100 American Markets Dow Jones Ind. Average NASDAQ Composite NASDAQ -100 S&P 500 Index, RTH Abs. Chg. % Chg. 2,156.42 3,309.64 4,290.28 9,941.00 423.79 9,285.60 6,542.20 11.0 51.7 62.0 159.1 5.4 132.6 40.8 0.5 1.6 1.5 1.6 1.3 1.4 0.6 17,613.68 4,661.50 4,166.20 2,023.03 -27.2 -3.2 -3.8 -5.2 -0.2 -0.1 -0.1 -0.3 Source: Bloomberg Foreign Portfolio Investment in Equities Country Pakistan India Indonesia Japan Philippines South Korea Sri Lanka Taiwan Thailand Vietnam Abu Dhabi Qatar Day (US$mn) 3.7 41.8 (29.3) N.A 21.3 (114.2) (3.1) 75.4 (63.3) (1.7) (4.1) (4.7) WTD (US$mn) 8.2 41.8 (34.7) (337.8) 322.5 (284.4) (1.3) 64.2 (132.7) 0.5 (4.5) (20.9) MTD (US$mn) (8.5) (352.5) (21.1) (337.8) 314.7 (372.2) (4.5) (475.8) (379.7) (3.3) (20.7) (36.0) YTD (US$mn) 12M (US$mn) (8.5) (352.5) (21.1) (337.8) 314.7 (372.2) (4.5) (475.8) (379.7) (3.3) (20.7) 120.1 362.9 15,720.8 3,596.0 21,556.7 1,596.8 5,581.3 153.0 12,413.0 (1,570.8) 108.7 936.1 2,452.2 Date 13-01 12-01 13-01 02-01 13-01 13-01 13-01 13-01 13-01 13-01 13-01 12-01 Source: Bloomberg, NCCPL Forex and Money Market snapshot 6-Month KIBOR (Offer) 12-M T-Bill (Average) 10- year PIB (Average) PkR/ US$ Current Previous Chg. 9.33 8.84 10.24 100.57 9.38 8.85 10.28 100.76 -0.05 -0.01 -0.04 -0.19 Abs. Chg. % Chg. -0.18 -2.51 -1.13 -0.4 -0.2 -0.5 Source: KASB Money Market Commodity Prices Price WTI (Crude Oil) Gold CRB Index 45.89 1,230.75 219.70 Source: Bloomberg Page 3
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