AKD Quotidian about — LOTPTA: Fundamentals merit a re-rate

Karachi, March 28, 2013 (PPI-OT): LOTPTA managed to break even in CYI2 (consolidated NPAT of PkRO.795mn), a sharp fall when compared with CYII (NPAT PkR4,178mn).

According to AKD Securities the decline in NPAT was primarily led by lower PTA sales and a sharp contraction in gross profit (GP) margins on compression in PTA-Px margins. There are a number of triggers in LOTPTA which should dovetail into multiple re-rating for the scrip. Firstly, AKD Securities believes the worst is over for PTA-Px margins, where int’l margins should stabilize above the US$100/ton going forward. Strong cotton prices (+ve for PTA) as well as recent decline in Px prices (down by US$160/ton CY13TD compared with US$70/ton decline for PTA) should support recovery in PTA-Px margins. Expansion in local demand for PTA is also on the cards as local PSF capacity expands. In this regard, IBFL.1s 227k tpa PSF expansion is expected to come online soon, which should enhance domestic demand of PTA by -200k tpa. Based on AKD Securities discounted cash flow valuation AKD Securities arrives at a Dec’13 TP of 10.6/share, offering an upside of 42% from current levels, “Buy”.

CYI2 review: LOTPTA managed to break even in CY12 (consolidated NPAT of PkRO.795mn), a sharp fall when compared with CY11 (NPAT PkR4,lT8mn). The decline in NPAT was primarily led by lower PTA sales (down -5%Y0Y) and a sharp contraction in gross profit (GP) margins on compression in PTA-Px margins. Key highlight for the year was the commencement of 43MW power plant which came online during 2HCY12. Despite being operational for only -6 months, the company recorded sizable fuel efficiency gains with per ton fuel cost declining by 22%YoY to PkR3,887/ton.

Triggers abound: There are a number of triggers in LOTPTA which should dovetail into multiple re-rating for the scrip. Firstly, AKD Securities believes the worst is over for PTA-Px margins, where int’l margins should stabilize above the US$100/ton going forward. Strong cotton prices (+ve for PTA) as well as recent decline in Px prices (down by US$160/ton CY13TD compared with US$70/ton decline for PTA) should support recovery in PTA-Px margins.

The sharp fall in PX price has been due to declining profitability of PTA operators (leading to mothballing of some regional capacities) as well as normalization of the Px-Naphtha spreads. For AKD Securities forecasts, AKD Securities has assumed PTA-Px margin of US$125/ton for CY13, and expect it to rise to US$150/ton in CY14. Furthermore, cost savings from the new cogeneration plant will come into play in CY1 3 where AKD Securities expects the per unit power cost to go dawn by another 30%YoY.

Px- Naphtha Spreads

US$Iton201020112012Jan13Feb13MarI3TD
Px1,0631,5451,5161,6661,6791,519
Naphtha7249399439591001926
Px-Naphtha324603547687658575

Source: Bloomberg and  ARC Research

IBFL’s PSF expansion to augment PTA demand: Expansion in local demand for PTA is also on the cards as local PSF capacity expands. In this regard, IBFL’s 227k tpa PSF expansion is expected to come online soon, which should enhance domestic demand of PTA by -200k tpa, adding to the positive momentum for LOTPTA. Lastly, revival of DSFL’s 241k tpa of PSF plant post successful debt re-structuring could potentially add 210k tpa of annual PTA demand in the country. This increase in demand could result in increased capacity utilization by LOTPTA.

Recommendation: AKD Securities expects CY1 3 to be a turnaround year for LOTPTA where AKD Securities forecast s the company to post NPAT of PkR1,OQ5mn (EPS: PkRO.72) on the back of marked improvement in PTA-Px spreads as well as fuel efficiency gains from the co-gen plant. Near term risks could be slightly weaker set of earnings in 1 QCY1 3 on the back of its biennial plant turnaround as well as volatile prices (PTA and Px) possibly leading to timing losses.

The scrip is currently trading at PIE and EV/EBITDA multiples of 1O3x and 2.8x, respectively. Based on AKD Securities discounted cash flow valuation AKD Securities arrives at a Dec’13 TP of 10.6/share, offering an upside of 42% from current levels, “Buy”.

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