Earnings Report /
Pakistan

Pakistan Chemicals: Earnings to sequentially lower amid normalized spreads

  • We expect LOTCHEM and EPCL to post combined NPAT of PKR5.1bn for 1QCY22, led by healthy international spreads.

  • LOTCHEM is expected to post 1QCY22 EPS of PKR0.87, where PTA-PX spreads averaged US$115/ton during the quarter.

  • EPCL is expected to post an EPS of PKR4.17 in 1QCY22, where PVC-Ethylene spreads averaged c.US$862/ton.

Ali Aziz Soorty
Intermarket Securities
15 April 2022
  • We expect IMS Chemicals universe (LOTCHEM and EPCL) to post combined net profits of PKR5.1bn for 1QCY22, mainly led by healthy international spreads. Spreads of both PTA and PVC benefited from global macroeconomic uncertainty (Russia - Ukraine conflict and China power crisis).

  • LOTCHEM is expected to post 1QCY22 EPS of PKR0.87, where PTA-PX spreads averaged US$115/ton during the quarter. Spreads were slightly lower from their recent peak due to consistently rising PTA prices; while new PX capacities came online in the region, which depressed its prices.

  • EPCL is expected to post an EPS of PKR4.17 in 1QCY22, where PVC-Ethylene spreads averaged c.US$862/ton. EPCL’s PVC capacity expansion improved while strengthening the topline, but spreads have started to come off since November 2021 to c.US$755/ton at present.

Earnings likely to sustain high base due to healthy spreads

We expect our Chemicals Universe (EPCL and LOTCHEM) to post combined net profits of PKR5.1bn, down 16%/12% qoq/yoy. Spreads remained resilient for most of the quarter, because both international PTA and PVC markets benefitted from a relative undersupply in their feedstock (PX and Ethylene respectively). Downstream demand remained unaffected amid robust growth coming from textile sector backed by elevated exports. This has offset the lower demand from the construction sector, due to elevated cost and winter effect in 1QCY22. These two stocks, having dollarized spreads are a good hedge against PKR depreciation.

LOTCHEM: Lower spreads will reduce GMs and profits

LOTCHEM is expected to post NPAT of PKR1.3bn (EPS: PKR0.87) in 1QCY22, down 7%/20% qoq/yoy. International PTA-PX spreads in 1QCY22 declined to c.US$115/ton from c.US$155/ton in 4QCY21. The company has an average historical inventory turnover of c.13 days, this leads to an earlier than expected decline in quarterly margins. Previously, PTA-PX spreads expanded because of an oversupply of PX led by new PX capacities in China while there were delays in commissioning of new PTA capacities. Now, PTA capacities are coming online and normalized demand has reduced overall margins. During the end of 1Q, PTA spreads have been extremely volatile (ranging c.US$100-170 per ton). GMs are expected to clock in at c.10% for 1QCY22, decreasing by 2/5ppt qoq/yoy. We do not expect any payout, as historically the company has a practice to pay in 3Q of each year.

EPCL: Delta has sustained for longer than expected

EPCL is likely to post NPAT of PKR3.8bn (EPS: PKR4.17) for 1QCY22, down 19%/18% qoq/yoy. PVC-Ethylene spreads peaked out at over US$1,200/ton in early November 2021 followed by a sharp downward correction to c.US$760/ton by the end of March. Spreads thus averaged around US$862/ton, down 18% qoq. Though PTA margins were on a downward trend, current macroeconomic indicators may shift this momentum as supply shortages are coming from Russia - Ukraine conflict. China being the world’s largest producer of PVC is currently combating a power crisis as well as major lockdown in their business capital Shanghai.  At current capacities, the worldwide demand for PVC is growing at c.4% whereas supply is only growing at a rate of c.2.5%. EPCL is expected to achieve GMs of c.32%, down 3/8ppt qoq/yoy. We expect an interim cash dividend of PKR4.0/sh.