Karachi: LOTPTA managed to post a slight profit of PkR151mn (EPS: PkR0.10) in 1QCY12, down significantly by 94%YoY on poor margins. GMs for 1QCY12 stood at just 2% compared with 24% last year following a steep 64%YoY fall in PTA-Px PMs. That said, there are a number of potential triggers for LOTPTA which could lead towards multiple re-rating for the scrip. Triggers include i) co-generation power plant commissioning, ii) seasonal uptick in demand, iii) rising domestic cotton prices and lastly iv) potential increase in PTA import duty in budget FY13. However, downward sticky Px prices remain the key risk for LOTPTA. The stock is currently trading at demanding CY12 P/E multiple of 112x and is trading at a 7% premium to AKD Securities’ target price of PkR8.37/share, implying a Reduce stance. That said, potential increase in PTA import duty could be a game changer and force us to revisit AKD Securities’ investment case.
1QCY12 result review: LOTPTA managed to post a slight profit of PkR151 mn (EPS: PkR0.10) in 1QCY12, down significantly by 94%YoY on poor margins. However, profitability was an improvement over 4QCY11 where the company posted NLAT of PkR4llmn (LPS: PkR0.27). GMs for 1QCY12 stood at just 2% compared with 24% last year following a steep 64%YoY fall in PTA-Px PMs to just US$157/ton. Sales of PTA stood at 119k tons, down slightly by 2%YoY, while production was down by 8%YoY to 117k tons.
Triggers lined up but optimism seems priced in for now: There are a number of potential triggers for LOTPTA which could lead towards multiple re-rating for the scrip. Triggers include i) co-generation power plant commissioning, ii) seasonal uptick in demand, iii) rising domestic cotton prices and lastly iv) potential increase in PTA import duty in budget FY13. Details of the triggers are as follows:
i) Co-generation power plant commissioning: As per the Directors’ Review, the 40MW co-generation power project will undergo its first trial run in 2QCY12, while AKD Securities expects the power plant to come online in 2HCY12. This is expected to improve fuel efficiency by 30% where AKD Securities has already incorporated the impact of cost savings in AKD Securities’ estimates.
ii) Seasonal uptick in demand: The Apr-Jun quarter has historically been the best quarter of for PTA sales, accounting for 27% of annual off take. Demand for PET bottles surges during 2Q as mercury levels rise, which in turn boosts demand for PTA (raw material for PET). Furthermore, PTA prices also peak during the Apr-Sep period, before falling sharply as the winter season approaches. Earnings for 2QCY12 are likely to rebound sharply as besides the uptick in demand, input Paraxylene (Px) prices have also started to fall from their recent highs. Resultantly, PTA-PX PMs were up to US$151/ton in Apr’12 from just US$112/ton in Mar’12.
iii) Domestic cotton up steeply from Mar’12 lows: Domestic cotton prices have risen sharply by 30% to PKR6,752/maund from their Mar’12 lows of PKR5,200/maund, which in turn is positive for PSF demand (cotton substitute). Recall that PTA is a raw material for PSF, where demand for PSF fell during 1QCY12 on low cotton prices.
iv) Hike in import duty could be a game changer: The LOTPTA mgmt. has been aggressively lobbying to raise the import duty on PTA as they have tied further investment in Pakistan to higher PTA import duty. The current import duty is a at 3%, much lower than regional peers. Hike in import duty could be a game changer for LOTPTA where AKD Securities estimates that only a 1% increase in duty would result in incremental EPS impact of ~PKR0.33 for LOTPTA.
Downward sticky Paraxylene remains key risk: Px prices have come off from their lofty highs in Mar’12, following low demand, as well as some regional PTA manufactures offloading their Px inventories since current margins made PTA manufacturing cost prohibitive. Px prices are likely to remain downward sticky with the only downside coming in the form of sustained drop in oil prices. For CY12 and CY13, AKD Securities has assumed PTA-Px Pms at US$150/ton, which is lower than the last 5-yr average of US$241/ton as Px supply tightness is likely to persist through the next couple of years.
Recommendation: LOTPTA is currently trading at a demanding CY12F P/E multiple of 11.2x and is trading at a 7% premium to AKD Securities’ target price of PKR8.37/share implying a Reduce stance. Upward revision in PTA import duty is the key upside risk to AKD Securities’ call.