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Engro Polymer & Chemicals Ltd: Raise estimates in line with recent surge in PVC spreads

  • We raise our estimates and TP for EPCL in light of recent surge in global PVC margins
  • Our new TP is PKR62/sh and our EPS estimates for CY21/22 are PKR14.06/6.50
  • The recent expansion will help capitalize on rising construction activity; PVC margins should fall to LT mean levels

We maintain our Buy stance on EPCL, with a new December 2021 TP of PKR62/sh. We have raised our CY21f EPS to PKR14.06 in light of the recent surge in global PVC spreads to all-time high levels. EPCL’s expansion has come online at an opportune time, where both domestic demand growth and margins are in the healthy zone. 

We now assume global PVC-Ethylene spreads for CY21 to average c.US$600/ton (US$400/ton earlier); they are likely to normalize in 2HCY21 when large global PVC producers resume production. CY22 onwards, however, we expect spreads to reach the 10yr mean level of c.US$400/ton.

In 1QCY21, EPCL posted its highest ever earnings, because of exceptional spreads (due to global PVC prices rising at a faster pace than global Ethylene prices). 2QCY21 earnings will exceed 1Q profits, in our view.

Reiterate Buy with a new TP of PKR62/sh

We maintain our Buy stance on Engro Polymer & Chemicals (EPCL) with a new December 2021 TP of PKR62/sh (from PKR57/sh earlier). Our liking for the stock stems from the company’s rising exposure to the local construction theme (rising use PVC in homes/offices) and the upcycle in global PVC demand and spreads (even if they are likely to normalize from record levels). In 1QCY21, EPCL posted its highest ever quarterly earnings of PKR4.56/sh, on the back of (i) exceptionally high average PVC spreads of c.US$840/ton, and (ii) inventory gains, as global PVC and Ethylene prices rose 19%/14% qoq. In 2QCY21, PVC prices and spreads have surged even further; meanwhile, EPCL’s PVC production capacity also increased to 295,000 tons pa. Because of the capacity expansion, we expect a 3yr CAGR of 15% for EPCL’s volumetric sales of PVC. We expect a potential upside of c.23% to our TP. Based on recurring earnings (CY22f) with normalized spreads, the stock is trading at a forward P/E of 7.7x.

PVC spreads should normalise in 2H but remain in the healthy zone

The stupendous rise in EPCL’s profitability in the previous two quarters was largely driven by the recent surge in global PVC prices and spreads over Ethylene prices. The spreads have set a new record above US$1,000/ton. Nonetheless, we think the increase in PVC prices is transitory (caused by shutdowns of major global large producers in the US and Asia, partly due to bad weather), and they are likely to decrease during 2HCY21, when these producers return to normal production levels. Nonetheless, we now expect spreads to average around US$600/ton during CY21 (vs. our earlier assumption of US$400/ton) – due to continued reopening of global economies and vaccine rollout. For CY22f onwards, however, we maintain our conservative approach and assume spreads to hover around US$400/ton (close to 10yr historical average) as PVC demand-supply normalizes. Our new EPS estimates for CY21/22 are PKR14.06/6.50.

Outlook for 2QCY21 earnings

In 2QCY21, PVC/Ethylene prices have risen c.20%/8% qoq, because of which PVC spreads have increased by 27% to over US$1,000/ton. Due to these favorable changes, we expect EPCL’s 2Q earnings to beat the previous quarter’s EPS of PKR4.56 (already a record). Gross margins will benefit from rising prices, inventory gains, and increase in volumetric sales – overcoming the negative impact of PKR appreciation and higher overheads post expansion. The expansion comes at an opportune time while PVC demand in the local market is rising amid construction upcycle (for instance, cement sales are up c. 20% yoy in 1QCY21).


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