Engro Laya Rupya!

There seems to be some gaming at play as far the IPO of Engro Fertilizers is concerned. It appears that the stakeholders, that is government, banks and Engro, have all come to an agreement of sorts to supply Engro with some gas for some, so that it can generate some cash, pay of the banks, make some Urea, save government imports, and so on. So in the end, Banks bhi khush, Engro bhi khush, or government bhi khush.

Cash Coming In

Now, is probably the best time to hold an Engro Fertilizers IPO. Engro will have received 4 months of continuous gas supply from the shutdown Guddu Power plant, pouring money, sorry prills through the 300 meter high prill tower. For the quarter ended Sep 30^th, 2013 Engro Fertilizers is going to get EPS of Rs 1.2, moreover, the EPS is going to increase in the last quarter, as full gas supply for the quarter takes effect making full year EPS around Rs. 4.2 . Let us just make it Rs. 4.

Assuming a multiple of 8, we can thus conservatively assume an IPO price of Rs. 32 per share. Further assuming the company wants to sell a stake of 10%, that is 122 million shares, that shall give the company around Rs. 4 billion in cash.

Some More ...

Engro Fertilizers made around Rs. 3 billion in operating cash flows during the first half of 2013. Assuming the gas supply continues as is, it will make somewhat more than Rs. 6 billion more by the end of the year. Add to that the Rs. 7.5 billion it had as of 30^th June 2013, and the Rs. 4 billion it will raise through the IPO, and further adding some money earned on the cash deposits, the company will have round about Rs. 18 billion by the end of 2013. This amount takes care of any finance costs paid during the half, but excludes any principal repayments.

Now the company has around Rs. 7.5 billion in current portion of long term debt as of June 30^th, 2013. Assuming it pays half of that by December, it will have Rs. 14.5 billion remaining in its kitty. This is a significant amount and could be used to pay of a large part of the company’s existing debt, that would still stand at Rs. 60 billion as at December 31^st, 2013, thus the paying off could get it down to Rs. 45 billion. 

Such deleveraging could significantly boost investor confidence.

So will the Guddu Gas Stop before 6 months?

I don’t think so. Guddu is one of the most inefficient plants in the country and already ran at low capacity. Moreover, it is under expansion and it makes all the sense in the world for the government to divert its gas it to Engro for urea production. Clearly, that is the best use of the gas for now. I have read that Guddu is currently in expansion phase which will not be completed at least the next six-nine months. So I don’t expect that to speed up or anything especially given its a government plant! Any inputs to this are Welcome!

Foreign investors are selling Engro like hot cakes. Buyers anyone? 

An EPS Calculator for Engro Fertilizers, Engro Corp.

Being stock market participants, we are often concerned with what the EPS of a company is going to be. This question is important as it greatly impacts valuations, though naively. For some companies, it is easy to calculate due to relatively little variables involved. One such company is Engro Fertilizers, which produces a single product and has a single raw material. Still, gas prices, Urea Prices, Gas availability pose as some of the key risk factors for company profitability. In order to gauge their effects, I have created an EPS calculator for Engro Fertilizers. Obviously, this has a full fledged model working behind it, but I have provided the basic inputs/outputs for analysis. So play and rejoice! a fully working EPS calculator for Engro Fertilizers! Default values are set for current quarter's expectation.

If you'd listended to me, You'd be a millionaire by Now!

Ok, I guess you'd need Rs. 850,000 to begin with.

Sitara Peroxide (SPL) has yielded a 17.5% return since I published my recommendation
six days ago. So if anyone had invested Rs. 851,000 in the stock at the time I published my recommendation, he'd indeed be a millionaire right now :P. The return is even more enticing given that the KSE 100 index has lost more than 5% of its value during the period. This means that the recommendations have acually beaten the market by around 22.5% during the six days ending today.

The story of Descon Oxychem (DOL), SPL's spiritual sister (spiritual since it has the same driving factors as SPL) is no different as it has yielded a similar return of 17.3% during the period.

The basis for the recommendation was simple. Increased peroxide prices would (the companies' product) result in increased gross margins. A constant cost base was also highlighted, as government changes gas prices only on a six monthly basis and the last change would not take place untill for the Septmebr quarter.

Moreover, as borrowed from a daily of SC securities, and credit duly given, decreasing finance costs in view of improved cash flows would further boost earnings.

Both the recommendations were correct and as it turned out, gross margin did increase for both the stocks and the finance costs decreased as well. Moreover, the EPS of especially DOL incerased significantly and the company recorded its highest EPS in 6 quarters.

The EPS chart along with the updated gross margin chart, which is the cornerstone of this analysis is presented below for illustration:

So whats next? My initial thesis was better still results for the September quarter due to even higher peroxide prices. The low finance costs theme should follow through as well driven by further improvement in cash flows. Gas price increase should have posed a risk for the stock since its the major raw material, but that risk has been nullified given the government's decision to deferr the same till November.

Any production and sales hiccups could however disrupt revenues and earnings potential, however if this serves as any consolation, sales and revenues have been relatively stable for the two companies given the historical trend.

Hence in view of further rise in peroxide prices, together with a calculated assumption of constant production and sales, I would still stick to my assertion of further improvement in financial performance for both the stocks for the quarter ended September 30th, 2013.

BUY DOL WHILE IT LASTS!

Buy Descon Oxychem (DOL) while it lasts! Its spiritual sister company, Sitara Peroxide had a good financial performance by predicted by me and has been on upper locks since last 2 days! However movement in DOL, while positive, has been minimal. I would suggest taking a position before the company announced the result soon!

Given the stock level is currently PKR 5.26, it represents a return of 30-50% even if just two upper locks occur! I would recommend to buy it for 6 month investment horizon.  

Sitara Peroxide FY13 Financial Result

Sitara Peroxide Announces Result

Ok Sitara Peroxide announced its result today. The company posted an EPS of Rs. 0.19 for the quarter. However, the EPS is not important as it was not part of the forecast. In my last post I had predicted an increase in gross margin based on increasing peroxide prices. The gross margin in fact did increase, up 4 percentage points month on month, to 26%. So this lends credence to the price-gross margin thesis and the same story should continue with increased effect for the September quarter . I guess Ill update the gross-margin, H2O2 Price graph for corroboration:

Not only does does this reinforce the idea of improved financial performance for next quarter, it also bodes well for Descon whose result will be announced on the 30th. It may be noted that SPL was on upper lock today and with Descon booking sizeable gains as well.

Descon Oxychem and Sitara Peroxide - Improved Financials

Descon Oxychem and Sitara Peroxide - Improved Financials

My post concerns two companies in the hydrogen peroxide industry in Pakistan. Descon Oxychem Limited (DOL) and Sitara Peroxide Limited (SPL). Both of the companies produce hydrogen peroxide that is a chemical used for bleaching, paper making, etc. Not surprisingly, the gross profit margin of these two companies follows the local of hydrogen peroxide prices as illustrated through the below graph:

Source: Business Recorder, Company Reports

Notice the absence of gross margins from the last two quarters. This is because the results pertaining to these have not been announced as of yet. Hydrogen Peroxide prices have however increased substantially during the period. Standing at Rs. 56 per kg today as opposed to Rs.44 in March-13, showing an increase of 16%.

An improvement in gross profit margins appears to be in order for the two quarters, that is, June 13 and September 13. The same analysis could be extended to operating margin due to comparatively lower administration and selling costs.

The final idea lends credit to SC Securities which says that the companies will experience declining finance costs too due to improved cash flows and lower working capital finance requirements.

I would say that a decline of 50 bps points in interest rates during the period should also help in decreasing finance costs. 

Owing to improved gross margins and lower finance costs, improvement in financial performance of the two companies, DOL and SPL appears to be in order for the quarters ending June-13 and Sep-13 .

JSIL - Freeing up cash flows

JS Investments

A behemoth in the golden age of Asset Management, with PKR 30 billion plus in assets under management and a management fee of PKR 500 million a year, the company is yet to regain its past glory. Thanks to the global financial crisis (Pakistani style) it faced significant redemptions, shriveled in size, resulting in decreased AUMs that have yet to get back up. The company’s AUM don’t matter however and this is not the story. The investment portfolio is.

As we all know, for a company, the income from an investment portfolio takes three forms. Dividends, realized gains and unrealized gains. Only the realized gains and dividends pass through the income statement affecting the EPS while the largest component, which is the latter, goes directly into equity. Due to the latter, the unrealized gains for JSIL have balooned, and BVPS is almost 2x the MVPS and is PKR 16 per share. The company is trading at a pesky PKR 8 per share.

So what if the company has so much gains. It would not do us any good (for us) unless it realizes them and converts them to cash right?

Well as a matter of fact, it has been cashing in those gains albeit a little bit. For instance the dividend is already cash and the company liquefies its investments from time to time for the realized gains. So it does have a cash flow from its investments and has been having so since long. But what does it do with them? The following excerpt from the income statement of FY12 explains:

And a little more from the latest march q accounts:

And we see that debt has fallen from PKR 1,050 million to PKR 520 million during the same period in a gradual way. 

The company will continue to have cash coming in as before. However there will be no debt to pay off any more. The only question is, what will it be doing with the money? A dividend should be easy since only PKR 100 million are needed for a PKR 1 per share dividend (13% dividend yield) given the company earns around PKR 400 million from operations and investments per year and already has sizeable investment gains. ThusDPS can turn out to be even more than PKR 1.

So whats will the company do?

Will it invest in its own units? Will it give out a dividend? Will it invest in some other stocks? Will it build a casino? I would place my bet with the former.