Earnings Report /
Pakistan

Engro Polymer & Chemicals Ltd: 4QCY21 review – Lower-than-expected tax rate lead to earnings beat

  • EPCL has posted NPAT of PKR4.7bn (EPS: PKR5.16) for 4QCY21 beating estimates with a final cash dividend of PKR5.5/sh

  • GMs clocked in at 35%, down 12.2ppt yoy but up 7.6ppt qoq, amid higher realized spreads

  • We have a Buy rating on EPCL with a Dec 2022 TP of PKR68/sh

Azan Memon
Azan Memon

Research Analyst

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Intermarket Securities
8 February 2022

EPCL has posted a NPAT of PKR4.7bn for 4QCY21 (EPS: PKR5.16), up 29% yoy and 51% qoq, against our expectation of PKR4.3bn (EPS: PKR4.71). The big jump in earnings is due to higher PVC-Ethylene spreads. Profits before tax are lower than our expectation due to higher Other expenses; however, a lower effective tax rate has led to earnings beat at NPAT level. The result takes CY21 net profits to PKR15.1bn, tripling yoy. The company also announced a final cash dividend of PKR5.5/sh taking the full year payout to PKR16.3/sh.

Key takeaways from 4QCY21 results:

  • Net Sales have clocked in at PKR20.7bn (broadly in line with estimates), up 10% qoq and 67% yoy amid rising PVC prices in the international market.

  • The company posted Gross Margins of 35% down 12.2ppt yoy but up 7.6ppt qoq. The qoq increase in GMs is due to healthy realized PVC-Ethylene spreads of about US$1,145/ton (Spot spread: US$1,107/ton).

  • Other Expenses, up 12% qoq and 6x yoy (due to low base effect), are higher than expected where the deviation could be attributed to exchange losses, in our view. PKR depreciated over 3% against the USD during the period.

  • Finance cost of PKR502mn are flat qoq despite the retirement of short-term borrowing by the end of 1QFY22. We think EPCL would have increased borrowing again during the quarter, while interest rates were rising.

  • Effective tax rate has clocked in at 21% for the quarter against our expectation of 35%. Our expectation of higher ETR was based on adjustment of ETR toward annual corporate tax rate of 29%, as happened last year. The annual tax rate has clocked in at 25%, which could be because of some deferred tax adjustment. We await the company’s analyst briefing meeting to shed more light on this.

The result beat our expectations while the payout shows confidence from EPCL about future earnings, even though international spreads have recently moderated a little. International PVC-Ethylene spreads are likely to remain healthy (albeit lower than present levels) and keep the company profitable; where we expect CY22/23 spreads to average at US$650/600 per ton (currently around US$840/ton). We maintain our Buy rating on the stock with a December 2022 TP of PKR68/sh.