AKD Quotidian about — KAPCO: Upside triggers ahead

Karachi, February 21, 2014 (PPI-OT): KAPCO has shed 9% after announcement of IHFVI4 result, where the company posted earnings decline of 23%YoY, which was well below expectations.

According to AKD Securities, the earnings decline was led by higher OandM costs as the company undertook major overhauls which stretched to Dec’13. However, AKD Securities expects 2HFYI4 earnings to rebound by 48% as compared to IHFYI4, while improved efficiency and expected energy savings from conversion of auxiliary boilers to coal is expected to lead to a robust 25%YoY earnings growth in FY15.

AKD Securities expects KAPCOs price performance to rebound in anticipation of strong results in 30FY14 and 40FY14 along with a robust payout of PkRS/share alongside the full year results. At current levels, KAPCO remains one of the top defensive picks in the AKD Universe with FYI4F D/Y of 13.6% and upside of 125% to AKD Securities’ revised TP of PkRG4/share. Accumulated

2QFYI4 earnings surprise: KAPCO posted NPAT of Pld~1,118mn (EPS: PkR1.27) in 2QFYI4, a decline of 42%YoY. bringing I HFYI4 NPAT to PkR2,B43rnn (EPS: PkR3.23). This was well below expectations as OandM costs spiked due to a major overhaul that stretched up to Dec’1 3 As a result, KAPCO has shed 9.4% in a knee-jerk reaction after announcement of the result.

In this regard, AKD Securities believes investors have ignored upcoming positives such as a48% sequential earnings growth in 211FY14 on the back of improved efficiency and a robust 245%YoY earnings growth in FY15.

KAPCO: Summarized PandL
1HFY14 Result Review                        2QFY14   QoQ      1HFY14     YoY
Sales                                       27,199   -9%      57,001     17%
Gross Profit                                 2,029  -24%       4,683    -25%
Other Income                                   924   42%       1,574    -48%
Financial Charges                              960   19%       1,765    -50%
NPAT                                         1,119  -38%       2,911    -21%
EPS                                           1.27              3.30
DPS                                           2.75              2.75
Source: Company Report and AKD Research

2HFYI4 to fare better: With major overhauls completed in 2QFYI4. AKD Securities expects higher utilization and improved efficiency to lead to NPAT of PkR4.207 (EPS: PkR4.78) in 2HFYI4. a sequential growth of 48%. This brings AKD Securities’ expected FYI4F earnings to PkR7,OSlmn (EPS: PkRB.O1) and dividend payout to PkR7.75lshare, implying FYI4F PIE of 7.lx and an attractive D/Y of 136%.

Robust growth in FYI 5: While AKD Securities still awaits details on KAPCO’s plan to convert its auxiliary heat load to coal, AKD Securities estimates the conversion to result in energy savings of-PkR4SOmn (EPS impact Pld~O.51).Along with favourable indexations, a higher load factor and improved thermal efficiency from the recent overhauls, AKD Securities expects KAPCO to post FYI5F EPS and DPS of PI~9.97 and PkR9.Slshare, implying compelling FYISF PIE of5.7x and D/Y of 16.7%.

Investment Perspective: AKD Securities expects KAPCO’s price performance to rebound in anticipation of strong results in 3QFYI4 and 40FY14 along with a robust payout of Pld~5/sham alongside the full year results. At current levels, KAPCO remains one of the top defensive picks in the AKD Universe with FY14F D1Y’ of 136% and upside of 12.5% to AKD Securities’ revised TPofPkR64lshare.Accumulate!