AsiaNet-Pakistan Premier Editorial Content and Press Release Distribution Service
Karachi, August 01, 2012 (PPI-OT): Plummeting margins to take toll on profitability
Company likely to suffer a 50% QoQ profitability decline in 2QCY12
Arif Habib Limited expects Lotte Pakistan PTA Limited (LOTPTA) to report profit after tax of PKR 75.9 million (EPS: PKR 0.05) in 2QCY12, a 50% QoQ drop, when compared with PKR 151 million (EPS: PKR 0.10) in 1QCY12.
According to Arif Habib Limited, this is likely to take 1HCY12 earnings down by 94% YoY to PKR 227 million (EPS: PKR 0.15) compared to PKR 3,669 million (EPS: PKR 2.44) in the corresponding period last year. This steep profitability drop is likely to come on account of a 161% drop in the primary margins and 50% YoY decline in the financial income.
| Financial Highlights | ||||||
| PKR million | 1QCY12 | 1QCY12 | QoQ | 9MCY11 | 9MCY10 | YoY |
| Net sales |
12,661 |
13,405 |
-6% |
26,066 |
30,661 |
-15% |
| Gross profit |
213 |
270 |
-21% |
483 |
5,657 |
-91% |
| Operating profit |
63 |
133 |
-53% |
197 |
5,004 |
-96% |
| Financial income |
129 |
130 |
-1% |
258 |
513 |
-50% |
| Profit before tax |
113 |
238 |
-52% |
351 |
5,385 |
-93% |
| Profit after tax |
76 |
151 |
-50% |
227 |
3,699 |
-94% |
| EPS (PKR) |
0.05 |
0.10 |
0.15 |
2.44 |
|
|
| Source: Company financials and AHL Research | ||||||
Net sales likely to drop by 15% YoY
Arif Habib Limited expects company to suffer a 15% YoY drop in net sales to PKR 26 billion in 1HFY12. This drop is likely to emanate mainly from 20% drop in PTA price coupled with a modest 1% drop in volumetric sales. Aggressive PTA capacity expansion in the region, lowering cotton prices and slowdown in PTA demand are the major reasons behind the PTA price fall.
Falling primary margins may lead to 91% YoY decline in gross profit
LOTPTA is likely to witness a 91% YoY contraction in gross profit to PKR 483 million in 1HCY12 compared to PKR 5,657 million in the same period a year back. This is mainly on account of 161% fall in the Spot primary margins (PTA-PX), which averaged around USD 117/ton during 1HCY12 compared to USD 306/ton in the same period last year. Aggressive PTA expansion in the region, falling cotton prices and demand contraction in China are taking their toll on the PTA prices and thus on the margins.
Depleting cash balances to reduce other income
Company average cash balance has witnessed a drop of 34% YoY, which coupled with a 200 basis points decline in the interest rate is likely to reduce the finance income by 50% YoY in 1HCY12 to PKR 258 million.
Outlook
Arif Habib Limited fears that 2HCY12 would continue to remain a challenging year for PTA manufacturers in terms of margin. Around 7.5 million tons of new PTA capacity would be added in the Asian market during CY12 for which hardly 1 million tons of new Px would be available. This is likely to keep Px scarce in the region causing downward stickiness in its prices. Price of PTA on the other hand is likely to remain under pressure due to slow down in demand from the downstream polyester sector. An intensifying EU debt crisis and subdued economic growth in US is likely to keep Chinese exports in check.
Margin recovery in 2QCY12 is likely to be short lived
Average spot PTA margins have improved by 13% QoQ in 2QCY12, averaging around USD 122/ton as against USD 108/ton in 1QCY12. However its impact would be more visible in 3QCY12 as major fall in PX prices was witnessed in June- 12. However this recovery, Arif Habib Limited fears is likely to be short lived as 5.4 million tons of PTA capacity is still to be added in 2HCY12, which is likely to put pressure on PTA price.
Recommendation
Arif Habib Limited continues to recommend underperformance stance on the scrip as it is currently trading at CY12E and CY13F PER of 15.7x and 10x, respectively, which are way above the market multiple of 6.3x. Thus Arif Habib Limited fears that the stock price would continue to remain under pressure.