Engro Polymer gives 73% return to shareholders
Aftab Ahmed
Islamabad: The Engro Polymer has given 73% return to shareholders following impressive performance as the scrip has outrun the benchmark index by a whopping 73% since FYTD.
The sharp outperformance has been mainly driven by the global upcycle in PVC primary margins (USD 1,073/ton, 2.8x since FYTD) which have reached their record-highs due to prolonged supply crunch.
Although we maintain our valuation estimates (Dec’21 TP of PKR 67/sh) for now, we believe there are some risks to our investment case which may keep the price performance of Engro Polymer under pressure going forward, BMA Capital Limited said in a report.
It sees key risk factors emanating from fewer chances of extension in anti-dumping duties on PVC imports, and demand compression following the conclusion of construction sector stimulus package.
Normalization of margins may also contain earnings growth. If the above-mentioned risks play out, we may have to revise down our investment thesis on Engro Polymer, it said.
Non-extension of anti-dumping duties may narrow down margins
Engro Polymer has so far been enjoying the comforts of a favorable duty structure on PVC imports, which allows the company to remain virtually immune to any new competition.
During 2018, the National tariff Commission (NTC) had also imposed an anti-dumping duty ranging from 3.45- 20.5% for a period of 5-years on imported PVC resin from China, South Korea, Taiwan, and Thailand.
Following the development, the company had witnessed a slight surge in its gross margins to an average of 23% from CY18-20.
However, the antidumping duty is all set to expire in CY22 and there is a possibility that NTC may not extend the existing anti-dumping duty to encourage competitive pricing given the government’s focus on the construction sector.
EPCL has already strengthened its position in the market with its recent PVC expansion (total capacity now stands at 295K tons) and has also been able to charge a slight premium on its product.
The company also exported nearly 2000 tons in 1QCY21 which shows its comfortable position in the local market. Keeping that in perspective, the NTC may not extend the anti-dumping duties which may narrow down the gross margins of the company.
Normalization of margins will keep earnings growth
PVC prices seem to be in a midst of a dramatic rally as they have shot up by 4x (currently at USD 1,600/ton) since Jul’20. PVC margins are currently hovering at a multi-year high level of USD 1,073/ ton. We think the margins will remain firm till at least Jun’21 due to heavy turnarounds planned by several PVC producers in the US.
However, they will revert to their normal levels afterward due to capacity additions planned by major PVC players, including Formosa Plastics and Shintech, in the later half of CY21.
Additionally, partial lockdowns imposed in India amidst the recent flare-up of coronavirus may diminish demand which will also negatively impact the margins of polymer. We are estimating PVC margins to average near USD 650/ton in CY21 and then normalize to their historic levels near USD 400/ton afterward, BMA said.
