Spectrum Securities Limited

Transcription

1 (REP-141) DOL: Fortune favours the bold Nov 07, 2018 Descon Chemical Limited (DOL) posted a tremendous growth in profitability during 1QFY19. This phenomenal growth was witnessed on stable sales volume, higher international prices of HP and PKR devaluation. Will high price continue to support earning? The international prices of Hydrogen Peroxide seem to remain strong in medium-term on accunt of supply side constraints consquently local prices to remain strong, moreover local HP prices determine on landed prices therefore devaluation of PKR increases the landed prices. Recently, the company reduced the Hydrogen Peroxide (HP) prices by Rs4/kg from PKR105/kg in the local market. This decline in prices could hamper the EPS of ~PKR0.17/share (PKR 37mn). We assume average Hydrogen Peroxide prices at PKR92/kg for FY19. Redemption of Preference shares The company currently announced redemption of 110mn preference shares, there are several options (conversion to debt, ordinary shares and etc.) under consideration, with most likely being through debt. Though, the company will probably arrange these funds by borrowing from financial institutions. On the basis of current interest rates scenario, a 12% expected interest rates per share impact would be PKR 0.92/share. On the other hand, end of 50% dilution in basic earning would make it an attractive stock. Plant expansion trigger growth The company plan to extend its current installed capacity by 25%, the extended capacity would grow the sales and bottom-line. During 3QFY18, the Board approved the expansion of plant from the existing facility of 28k to 42k, as the expansion would be completed by Dec-19, the cost is estimated at PKR 1.1bn which is mostly arranged through debt. Demand-supply dynamics The demand for hydrogen peroxide largely depends on the textile, paper & board, and food sectors. The government focused towards improving textile exports further increase the demand of Hydrogen Peroxide. Moreover, expanding foreign investment in food sector is also expected to increase the usage of hydrogen peroxide. Similarly, paper & pulp capacity utilization would bound to increase the demand for hydrogen peroxide. D escon Ox ychem Ltd. PK R/Share Current Price: (LD CP) 35.6 Targ et Price: W eek: H ig h W eek: Low U pside: 74% BUY HOLD SELL Equity Inform ation Year End: K ATS: Bloom berg Reuter: Abdul Azeem abdul.azeem@spectrumonline.com.pk + 92 (021) Abbas Haider abbas.haider@spectrumonline.com.pk + 92 (042) June D OL D OL.PA D OL.K A Ostdg. Shares (m n): F ree F loat Share (m n): 40.8 Source : PSX, Sp e ctru m Re s e a rch Financial Projections (Rs mn) FY18A FY19E FY20E Sales 2,088 3,093 3,572 COGS 1,472 1,710 2,059 GP 616 1,383 1,513 Admin Exp Selling and Dist. Expense Other Expense Other Income Operating Profit 459 1,197 1,309 Finance Cost Profit Before Tax ,065 Taxation Profit After tax EPS basic EPS Diluted Source: Company Account, Spectrum Research Page 1 of 3

2 Expanding HP capacities create over supply? There are two major Hydrogen Peroxide plants in Pakistan, Sitara Peroxide and Descon Oxychem both located in Punjab, accumulated production capacity is ~58k tons. Engro Polymer is also planning to invest USD23mn in H2O2 plant. Although, the plant capacity is not mentioned but we believe 20k ton of new capacity. The current demand of H2O2 is ~65k tons with the new capacity the total production capacities to reach at 106k tons/year. We believe, due to transportation hurdles the EPCL will focus on southern demand which is currently fulfill by imports while northern market will remain under the control of DOL and SPL. D escon O x y chem Lim ited H P Prices R s/k g B asic E PS H2O2 production & capacities ('000' tons) DOL SPL EPCL Total Current Capacity Production % 120% 100% Price Performance DOL KSE-100 Utilization 118% 70% % Expansion Capacity post Expansion Total Demand % 40% 20% 0% Excess Capacity % Source: Company Account, Spectrum Research -40% PKR/USD Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Nov-17 Aug-18 Dec-17 Sep-18 Oct-18 Jan-18 Feb-18 M ar-18 Apr-18 M ay-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Risk Reversal of anti-dumping duty imposed on HP. Dependency on the textile sector (being the major HP consumer). Energy shortage or tariff increase (Gas & Electricity). Appreciation in PKR against USD New capacity of Engro Polymer Declining trend in prices Increase in Interest Rates Page 2 of 3

3 Outlook and recommendation The major demand drivers of HP are textile, paper & board, and food sectors. The announcement of textile export policy by the GoP will improve textile exports, therefore an increase in demand from the textile sector is expected. Moreover, the increase in the usage of HP in the food sector coupled with growth, and FDI is also expected to increase the demand for HP. Similarly, paper & pulp capacity utilization would also increase the demand for HP as well. The massive devaluation of PKR against USD during the past year has supported the local HP price as local prices interlinked with imported prices The weight of contractual sales in total sales is ~20%, the revision in contract on current high price would improve the sales and margins of the company which are currently facing the heat of higher LNG tariff. Recommendation "Buy" with Jun-19 TP PKR 62/share The scrip is currently trading at P/E of 6.1x and 4.8x based on FY19 and FY20 EPS estimates. Led by robust earnings growth, the stock has rallied ~174% since Jan-18, however, it is still undervalued. Our Jun-19 TP's of PKR 62/share indicates 74% growth potential. Page 3 of 3

4 About the Company: The company Spectrum Securities Limited ("SSL")was acquired from M/S Mazhar Hussain Securities (Private) Limited. Mazhar Hussain Securities (Private) Limited was constituted in December 19, Later, Spectrum Securities took over Mazhar Hussain Securities on October 27, 2014 and registered in the name of Spectrum Securities Limited. The management of SSL has stepped into the industry with its agenda to attract the Corporate Clients therefore they decided to come up with the new outlook, introducing a new management team of professionals. SSL is TREC Holder of Pakistan Stock Exchange Limited. Research Rating Categories SSL uses three rating categories, depending upon total return from current market price as follows, with Target period as June/December 2018 for Target Price ; Equity Valuation Methodology and the Risks that may impede achievement of the Target Price Following valuation Models are used to arrive at the target price of subject security(ies); Rating BUY HOLD Description Total return of subject security(ies) is more than +10% from last closing of market price(s) Total return of subject security(ies) is between -10% and +10% from last closing of market price(s) SELL Total return of subject security(ies) is less than -10% from last closing of market price(s) Free Cash Flow to Equity (FCFE) Free Cash Flow to Firm (FCFF) Dividend Discount Model (DDM) Price to Earning (PER) Risk Following risks may potentially impede the achievement of the Target Price of subject security(ies); Market risk Interest Rate Risk Exchange Rate Risk.

5 Disclaimer This document is prepared by Research analyst at SSPL. This report is for information purposes only and does not constitutes an offer, or invitation to make an offer, to buy or sell any securities. The information contained herein is based upon publicly available data and sources believed to be reliable. The information contained herein is based upon publicly available data and sources believed to be reliable. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. SSPL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, SSPL is under no obligation to update or keep the information current. SSPL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. SSPL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report. This report is prepared for the use of SSPL's clients and SSPL reserves the right for its distribution. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of SSPL Opinions and recommendations provided does not take into account specific investment objectives or particular investment needs of any specific person or group of persons who may receive this report. Analyst Certification: Abdul Azeem and Abbas Haider certify that all the views expressed in this report about the subject matter are an accurate depiction of my personal views and no part of my compensation or any other benefits, was/is/will be, directly or indirectly, related to the specific recommendation and views expressed in this report. In addition, compensation of the Analyst(s) is not determined nor based on any other service(s) that SSL is offering. Analyst(s) are not subject to the supervision or control of any employee of SSL's non-research departments, and no personal engaged in providing nonresearch services have any influence or control over the compensatory evaluation of the Analyst(s). Furthermore, I do not have any interest (financial or otherwise) in the subject scrip.

6 Contact Us: Registered Office: Room No , 4th Floor, Stock Exchange Building I.I. Chundrigar Road Karachi, Pakistan. Contact No Branch Office (Karachi):- Office No. 706, 7th Floor, Business & Finance Centre I.I. Chundrigar Road, Karachi, Pakistan. Contact No Branch Office (Lahore):- 1st Floor, Plaza No. 287, Block Y, Phase-3C, DHA, Lahore Cantt, Pakistan. Contact Person: Jamshaid Hassan ( ) Executives Ahmed Nabeel Chief Executive Officer (+92-21) Ext: 111 Imran Memon Chief Operating Officer (+92-21) Ext: 333 Equity Research Team Abdul Azeem Head of Research (+92-21) Ext: 222 Saad Bin Tahir Research Analyst (+92-21) Ext: 115 Sunny Kumar Research Analyst (+92-21) Ext: 114 Abbas Haider Research Analyst (+92-42) abbas.haider@spectrumonline.com.pk Junaid Javed Database Officer (+92-21) Ext: 113 junaid.javed@spectrumonline.com.pk Equity Sales Team Fawad Mansoor Senior Sales Executive (Institutions) (+92-21) Ext: 308 m.fawad@spectrumonline.com.pk Fahim Qasim Senior Sales Executive (Institutions) (+92-21) Ext: 306 fahim.qasim@spectrumonline.com.pk Muhammad Farhan Senior Sales Executive (Institutions) (+92-21) Ext: 304 m.farhan@spectrumonline.com.pk Naveed Motiwala Senior Sales Executive (Retails) (+92-21) Ext: 309 naveed.motiwala@spectrumonline.com.pk Aamir Sales Executive (Retails) (+92-21) Ext: 305 aamir.dejwani@spectrumonline.com.pk Jamshaid Hassan Branch Manager (Lahore Branch) (+92-42) jamshaid.hassan@spectrumonline.com.pk