Topline raised ICI Pakistan target price to Rs,1,130

Topline Securities has initiated coverage on ICI Pakistan Limited (ICI) with a ‘Buy’ rating and a Dec-2021 Target Price (TP) of Rs1,130, offering a potential total return of 29% (including a dividend yield of 4%).

ICI will post a 5-year (FY20-FY25) earnings CAGR of 34%, where the Soda Ash segment is likely to drive profitability growth amid demand pushed expansion. NutriCo Morinaga and Polyester segments will be key to profits as well.

Soda Ash: This segment has been the largest contributor to ICI Pakistan’s operating profit (64% in FY20) and we believe it will continue to do so on the back of the rising demand for Soda Ash. ICI has announced an expansion of 135k tons to take total capacity to 560k tons, of which 75k tons is expected to come online by FY23 and 60k tons by FY24. We expect the operating profit of the Soda Ash segment to grow at a 5-year (FY21E-FY25F) CAGR of 19%.

NutriCo Morinaga: ICI has added a consumer flavor to its diversified portfolio with a 51% stake in NutriCo Morinaga Private Limited, which is manufacturing infant milk with an annual production capacity of 12k tons.

Topline Securities believe, this segment is likely to be the second largest contributor of 20% in the operating profits of ICI in FY22, of which ICI holds 51% stake.

Polyester (PSF): During FY21, a contribution from this segment is around to clock in at 36% (second largest) in operating profits amid high PSF margins due to global supply-side disruptions, resulting in windfall gains for the company this year. We believe margins to remain above the historical average in FY22 and average at US$520/ton with a long-term assumption of  US$485/ton.

Valuation: ICI offers a potential upside of 29% to our Target Price of Rs1,130. The stock is currently trading at a FY21E and FY22F P/E of 14.16x and 16.46x, respectively – which is at a discount of 37% and 27% to ICI’s historical 5-Year (FY16-FY20) average multiple of 22.6x and 22% and 10% to ICI’s historical 10-Year (FY11-FY20) average multiple of 18.23x.

Key risks to our investment thesis include (1) delay in Soda Ash expansion, (2) higher than expected increase in energy prices (Coal, Gas, and Oil), (3) higher than expected PKR devaluation, and (4) lower than expected PSF margins.