Lotte Pakistan PTA Ltd – Onlookers comment|CY10E P/E 2.8x

Posted on July 2, 2010

Company has some cash balance of around Rs 7bn at the end of 1Q-CY10. The company is also sitting at a cheap EV/EBITDA of nearly 1x and relatively less geared.  As for CY10 net earnings, LOTPTA’s financial charges are toned down; however, company is still geared apparently given new parent company namely KP Chemicals Group loan. This is some indication that the group plans to invest in enhancing PTA production. At present, LOTPTA is still a sole PTA producer (product supplied to PSF manufacturers) and its sales remained all booked as being claimed by the company despite our hunch of problems faced by one big PSF manufacturer. Despite incidence of cash balance, company’s accumulated losses stands at Rs 7.5bn but its gearing is almost 40%, therefore, company has the propensity to leverage its operation for expansion or also think of pursuing diversification to hedge overall business model of PTA supplies.

Expansion or no expansion….have a look at host of issues Custom duty tariff (demand and supply dynamics mitigate withdrawal of ‘compensatory support’ SRO issue : PTA is subject to a compensatory support SRO of Oct 7, 2008 based protection of about 7.5%.Currently government is reviewing SRO to withdraw or reduce it. Just in case if it is withdrawn then it may have some negative impact on LOTPTA’s profitability as per few market analysts given some lessening margins; we do not hold this view given demand supply situation especially when product is now having more demand as against preceding year. We
see LOTPTA may pass on any adverse impact to the market due to the fact that it has the sole advantage of small lead time as against imported PTA.
Previously,p charge of 7.5% is built in the price quoted to suppliers and this reimbursed to PSF manufacturer by GOP but elimination/reduction shall initially
increase the cost of PTA to PSF manufacturers who will be compelled to buy PTA given hike in local cotton lint prices. Patterns of PTA consumption & Issues related to DSFL : PTA is used by PSF manufacturers but every now and then PSF manufacturers are facing difficulties with their operations like one of the biggest consumers of PTA , Dewan Salman (DSFL) faces host of issues but currently industry demands stands at 750Ktons wherein LOTPTA produces around 500k tons.
Correlation with cotton prices: Cotton prices peaked around Rs 7,000/maund due to robust demand of yarn internationally, specifically China. Similarly PSF margins viz. PTA margins have also increased (PTA margins improved to the extent of USD 200 – USD 280/ton range in this period thus spelling some profitability for LOTPTA especially 4Q-CY09). In Pakistan, just like elsewhere globally, PSF is considered a substitute for cotton and also called cheap made cotton or man-made cotton and its demand have finally picked up to a certain degree after bout of underperformance since FY06 – 07 when naphtha based polymer resin prices had started picking up at the pretext of hike in oil prices.
Production capacities coming online & Global economic recovery: Globally PTA expansions are coming on-line and with
global economic recovery at low pace due to Greece crisis PTA margins has dip in this quarter but currently hovering above
US $210/ton.
Perceived valuation: We have assumed primary margins to remain in the vicinity of US$ 225/ton – US$ 270/ton during the
course of this year. Based on our assumption, we see earning propensity to remain robust for LOTPTA at the close of CY10.
Our avg. case scenario spells P/E base of 2.8x.

Company has some cash balance of around Rs 7bn at the end of 1Q-CY10. Thecompany is also sitting at a cheap EV/EBITDA of nearly 1x and relatively less geared.As for CY10 net earnings, LOTPTA’s financial charges are toned down; however,company is still geared apparently given new parent company namely KP ChemicalsGroup loan. This is some indication that the group plans to invest in enhancing PTAproduction. At present, LOTPTA is still a sole PTA producer (product supplied to PSFmanufacturers) and its sales remained all booked as being claimed by the companydespite our hunch of problems faced by one big PSF manufacturer.Despite incidence of cash balance, company’s accumulated losses stands at Rs 7.5bnbut its gearing is almost 40%, therefore, company has the propensity to leverage itsoperation for expansion or also think of pursuing diversification to hedge overallbusiness model of PTA supplies.Expansion or no expansion….have a look at host of issuesCustom duty tariff (demand and supply dynamics mitigate withdrawal of‘compensatory support’ SRO issue : PTA is subject to a compensatory support SROof Oct 7, 2008 based protection of about 7.5%.Currently government is reviewingSRO to withdraw or reduce it. Just in case if it is withdrawn then it may have somenegative impact on LOTPTA’s profitability as per few market analysts given somelessening margins; we do not hold this view given demand supply situationespecially when product is now having more demand as against preceding year. Wesee LOTPTA may pass on any adverse impact to the market due to the fact that ithas the sole advantage of small lead time as against imported PTA.Previously,p charge of 7.5% is built in the price quoted to suppliers andthisreimbursed to PSF manufacturer by GOP but elimination/reduction shall initiallyincrease the cost of PTA to PSF manufacturers who will be compelled to buy PTAgiven hike in local cotton lint prices.Patterns of PTA consumption & Issues related to DSFL : PTA is used by PSFmanufacturers but every now and then PSF manufacturers are facing difficultieswith their operations like one of the biggest consumers of PTA , Dewan Salman(DSFL) faces host of issues but currently industry demands stands at 750Ktonswherein LOTPTA produces around 500k tons.Correlation with cotton prices: Cotton prices peaked around Rs 7,000/maund dueto robust demand of yarn internationally, specifically China. Similarly PSF marginsviz. PTA margins have also increased (PTA margins improved to the extent of USD200 – USD 280/ton range in this period thus spelling some profitability for LOTPTA
especially 4Q-CY09). In Pakistan, just like elsewhere globally, PSF is considered a substitute for cotton and also called cheapmade cotton or man-made cotton and its demand have finally picked up to a certain degree after bout ofunderperformance since FY06 – 07 when naphtha based polymer resin prices had started picking up at the pretext of hikein oil prices.Production capacities coming online & Global economic recovery: Globally PTA expansions are coming on-line and withglobal economic recovery at low pace due to Greece crisis PTA margins has dip in this quarter but currently hovering aboveUS $210/ton.Perceived valuation: We have assumed primary margins to remain in the vicinity of US$ 225/ton – US$ 270/ton during thecourse of this year. Based on our assumption, we see earning propensity to remain robust for LOTPTA at the close of CY10.Our avg. case scenario spells P/E base of 2.8x.

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