Earnings Report /
Pakistan

Pakistan Chemicals – Earnings to slide amid one-offs and lower spreads

  • IMS chemicals universe is expected to take a drastic hit on profitability, led by lower margins and one off super tax

  • LOTCHEM is the most safeguarded company in our universe due to less leveraged and high cash position

  • We expect our Chemicals Universe (EPCL, LOTCHEM & ICI) to post combined net profits of PKR3.2bn, down c.68% QoQ

Intermarket Securities
1 August 2022

We expect IMS Chemicals Universe (LOTCHEM, EPCL and ICI) to post combined NPAT of c.PKR3.2bn which is set to decline sharply by 68%/39% QoQ/YoY, mainly due to (i) decreasing international spreads (in case of LOTCHEM and EPCL), (ii) higher exchange losses and (iii) one-off super tax impact.

The IMS chemicals universe is expected to witness a drastic hit on profitability, majorly led by lower margins and one off tax adjustment in the form of super tax. LOTCHEM is the most safeguarded company in our universe due to lower leverage and better cash position, shielding it to a certain extent from high finance cost.

EPCL and ICI have seen a major chunk of their profitability expunged due to the one off super tax (10% on annual earnings) which is likely to elevate their ETR to 75%/82% respectively.  It is essential to realize that these measures are one off and we believe profitability will normalize, if not fully revive due to elevated variable cost in coming quarters. 

Falling primary margins and super tax to keep check on profits

We expect our Chemicals Universe (EPCL, LOTCHEM and ICI) to post combined net profits of c.PKR3.2bn, down c.68% QoQ. Spreads remained volatile for most of the quarter, because both international PTA and PVC markets saw a jolt in demand and increase in cost of feedstock (PX and Ethylene, respectively). All Chemical companies are expected to take one-off super tax hit, which was introduced in FY23 budget. This will further dampen the profitability of the sector, in our view.

LOTCHEM: Textile exports supporting PTA demand

LOTCHEM is expected to post NPAT of PKR1.2bn (EPS: PKR0.81) in 2QCY22, down 53% QoQ and up 27% YoY. International PTA-PX spreads in 2QCY22 declined to c.US$155/ton from c.US$165/ton in 1QCY22. 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. GMs are expected to clock in at c.13.5% for 2QCY22, decreasing by 6ppt QoQ. We do not expect any payout, as historically the company has a practice to pay in 3Q of each year.

EPCL: Delta is unable to sustain elevated levels

EPCL is likely to post NPAT of PKR1.5bn (EPS: PKR1.50) for 2QCY22, down 71%/56% 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$707/ton by the end of June. Spreads thus averaged around US$774/ton, down 18% QoQ. News circulating within the industry suggests that consumers are still hesitant to buy PVC at current prices as they believe further reductions are in sight. Coupled with this, slowdown within the construction industry will keep a check on EPCL's demand as pipes and fittings are seeing lackluster demand growth. We expect the company to pay an interim cash dividend of PKR1.25/sh.

ICI: Super Tax wreaks havoc

ICI is likely to post a NPAT of PKR452mn (EPS: PKR4.90) for 4QFY22, down a whopping c.80%/50% QoQ/YoY. Earnings have been majorly hindered by a one-off higher taxation of c.PKR2bn (ETR of c.82%). Along with super tax, variable cost has seen a drastic increase. Hence, gross margins are estimated to come off by c.2ppt QoQ. Although the company has a history of paying dividend in the final quarter, recent bid for the acquisition of LOTCHEM may result in ICI skipping a payout this time.