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