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Karachi, August 03, 2012 (PPI-OT): Lower production may drag bottom line into the red zone
The board of directors of Engro Polymer and Chemicals Limited (EPCL) is scheduled to announce 1HCY12 financial result on August 6, 2012.
According to Arif Habib Limited expects the company to suffer a net loss of PKR 62 million (LPS: PKR 0.09) in 2QCY12 compared to a net profit of PKR 412 million (EPS: PKR 0.62) in 1QCY12. This loss is expected mainly on account of a 30% QoQ anticipated decline in PVC sales due to a scheduled plant shut down during the quarter. In addition to this, a 4% depreciation of the PKR against the USD during the quarter under review is likely to cause exchange loss on LIBOR base loans, which is anticipated to drag bottom line of the company into the red zone. This loss is likely to reduce the cumulative 1HCY12 earnings to PKR 350 million (EPS: PKR 0.53) compared to net loss of PKR 207 million (LPS: PKR 0.31) in the corresponding period last year.
| Financial Highlights | ||||||
| PKR million | 2QCY12 | 1QCY12 | QoQ | 1HCY12 | 1HCY11 | YoY |
| Net sales |
3,537 |
4,964 |
-29% |
8,501 |
7,895 |
8% |
| Cost of sales |
2,758 |
3,913 |
-30% |
6,670 |
6,879 |
-3% |
| Gross profit |
779 |
1,051 |
-26% |
1,830 |
1,016 |
80% |
| Other operating expenses |
179 |
88 |
102% |
267 |
68 |
2.9431 |
| Finance cost |
357 |
358 |
-0.4% |
715 |
753 |
-0.051 |
| Taxation |
16 |
214 |
-93% |
230 |
112 |
1.0482 |
| Profit (Loss) after taxation |
(62) |
412 |
nm |
350 |
(207) |
nm |
| Per share – PKR |
(0.09) |
0.62 |
nm |
0.53 |
(0.31) |
nm |
| Source: Company accounts and AHL Research | ||||||
Top line is expected to jump by 8% YoY
Arif Habib Limited expects net sales of the company to jump by an 8% YoY to PKR 8.5 billion in 1HCY12, mainly on account of an 11% YoY improvement in the expected volumetric sales of PVC. The highest ever sales in 1QCY12 helped the company to this volumetric growth despite the fact that it had to undergo a planned shutdown in 2QCY12. Furthermore declining PKR is likely to improve realized PVC price by a 6%, despite an 11% YoY fall in the average international PVC price during the period under review.
Improved VCM production is likely to yield 80% YoY growth in gross profit
The company is likely to achieve an 80% YoY increase in gross profit to PKR 1.8 billion in 1HCY12. This is expected mainly on account of a 63% YoY improvement in the in house VCM production. In addition to this, a 7% YoY improvement in the realized margins is likely to further support the gross profit, widening the gross margin to 21.5% in 1HCY12 in comparison to 12.9% in 1HCY11.
Exchange loss to swell other expenses by 3.7x
EPCL has a LIBOR based USD loan from IFC, which is likely to cause an exchange loss due to a 4% fall in PKR against the greenback in 2QCY12. This is likely to take other operating expense to PKR 267 million in 1HCY12 compared to PKR 68 million in the same period last year, up by ~4x.
Recommendation
At the current price levels Arif Habib Limited recommends a hold stance for the scrip as expected loss in 2QCY12 may keep the stock price under pressure. The stock is currently trading at a 31% premium to the market multiple, which poses the risk of further price correction.