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EFERT: Earnings Fall on Lower Pricing Power

Engro Fertilizers Limited (EFERT) recently announced its first quarter financial results for the period ended March 2017. During this period, the company earned Rs 1.66 billion after-tax profit (EPS: Rs 1.24), down 22% YoY as against Rs 2.12 billion (EPS: Rs 1.55) net profit that it achieved during the same period last year. The decline was attributed to depressed volumetric urea and DAP off-take coupled with lower urea prices. Increased Selling and Distribution expenses also skewed bottom line earnings on the back of higher cost of inventory holding.

Urea Production and Off-Take Face Pressure

During the period, the company produced 447 KT of urea; down 13% as compared to 514 KT that it produced in 1QCY16, amid outage at Enven plant. Meanwhile, urea off-take was 269 KT, down 6% YoY as against 286 KT in 1QCY16. Lower sales remained amid increased competition resulting from the oversupply situation. Government has retained 5% GST along with Rs 156/bag cash subsidy in FY18 budget. Moreover, it also reduced imported urea prices to Rs 1,000/bag. EFERT features skewed DAP with 37K tons sale as compared to 65K tons sale in 1QCY16. Lower sale was attributed to increased international prices and pricing cap by the government to discourage DAP imports. In FY18 budget, the government announced rationalization of tax on the commercial import of DAP fertilizer. In this regard, both commercial importers as well as urea manufacturers will be taken into final tax regime. Hence, EFERT's DAP sales are likely to remain thin. On the contrary, the revised GST on NP, NPK, SSP and CAN to Rs 165-168, Rs 251-341/, Rs 31, and Rs 98 per bag are likely to provide support on their part.

Rs in Million 1QCY17 1QCY16 YoY 4QCY16 QoQ

Net Sales 10,064 11,871 -15% 28,626 -65%
Cost of Sales 6,571 7,667 -14% 22,958 -71%
Gross Profit 3,493 4,204 -17% 5,669 -38%
Distribution Expenses 1,291 855 51% 3,277 -61%
Administrative Expenses 250 244 3% 256 -2%
Other Operating Expenses 208 274 -24% 375 -45%
Other Income 1,213 1,007 21% 3,743 -68%
Finance Costs 685 751 -9% 773 -11%
Profit before Taxation 2,272 3,088 -26% 4,732 -52%
Taxation 616 967 -36% 1,363 -55%
Profit after Taxation 1,656 2,121 -22% 3,369 -51%
EPS (Rs) 1.24 1.55 2.47
Source: Company reports

Government's Incentives for Farmers

In FY18 budget, the GoP extended agricultural credit by 43%, along with exemptions on custom duty and sales tax on combined harvesters imports of up to five years old. Meanwhile 10% RD on 5-10 years old, whereas 20% RD on 10 and more years old threshers, is suggested. Further, markup rates on agri-financing, while subsidized electricity tariff for their agri-tube wells were also suggested to facilitate farmers. These actions would ultimately benefit fertilizer industry, as farmers start to plough more.

Outlook

While Kharif season is round the corner, urea demand is projected to pace up in 3QCY17. At export front, EFERT had exported 31K tons urea against 300K tons quota allocation by ECC. We believe major export will take place in next quarter as the company holds 1,537K tons inventory with it. 3% Super Tax continuation will however continue to harm the PAT. EFERT share is currently trading at Rs 56.12/share, up 55% against our December 2017 target price of Rs 87/share.



HASCOL: Better Volumes Boost Profits

In its 1QCY17 financial results announcement, Hascol Petroleum Limited (HASCOL) declared an after-tax profit of Rs 377 million (EPS: 3.12), up 86% YoY as compared to Rs 202 million (EPS: 1.68) that it achieved during 1QCY16. The growth was attributed to 34% YoY growth in total sales volume during the first quarter, higher regulated margin despite higher effective taxation.

Gigantic Growth In Volume Continues

Mainly owing to robust sales volume, net sales of the company reached Rs 34.89 billion in 1QCY17 from Rs 20.35 billion in the identical period in CY16, depicting hike of 71% YoY. Volumetric sales rise by 34% to 560k tons versus 417k tons in 1QCY16. The massive surge in sales volume driven by of Petrol sales with significantly surge by 64% to 195k tons compared to 119k tons in identical period last year. Similarly, High Speed Diesel and Furnace oil sales up by 36% & 6% YoY to 228k tons & 137k tons in 1QCY17 respectively. The cost of sales was surged by 71% YoY in 1QCY17 to Rs 33.46 billion as against Rs 19.59 billion in 1QCY16. Therefore gross profit increased by 87% YoY in 1QCY17 to Rs 1.42 billion compared to Rs 762 million in 1QCY16. The gross profit margin rose to 4.1% in 1QCY17 versus 3.7% in 1QCY16.

Rs in Million 1QCY17 1QCY16 YoY 4QCY16 QoQ

Net Sales 34,894 20,352 71% 29,446 19%
Cost of Sales 33,466 19,590 71% 28,083 19%
Gross Profit 1,428 762 87% 1,364 5%
General and Admin Exp. 689 479 44% 701 -2%
Other Operating Income 67 56 20.5% 60 11%
Other Expenses 23 0 N/A 3 588%
Finance Cost 114 103 11% 114 0%
Profit before Taxation 669 236 184% 605 11%
Taxation 293 34 770% 293 0%
Profit after Taxation 377 202 86% 312 21%
EPS (Rs) 3.12 1.68 2.58
Source: Company reports

Mehmoodkot-Based Storage Depot Is Operational

During the quarter, the company enjoyed better presence in Southern Punjab region amid the commencement of its Mehmoodkot based storage facility. This storage facility has enabled Hascol to receive diesel directly from Karachi to Southern Punjab. It is pertinent to note that the company is also establishing storage depots at Sahiwal, Amangarh, Thalian and Kotlajam. We believe that with the completion of these facilities, Hascol will observe better sales volume figures in near future; especially during the era when oil tankers calls upon strike, halting businesses of other OMCs.

Oil Blending and Grease Plant under Construction Phase

Besides storage facilities establishment, the company is also setting up Lube oil blending and grease plant setup on 6 acres area at Port Qasim, which is anticipated to get operational by FY18. Additionally, Hascol has acquired land adjacent to the Byco Refinery to build a storage facility next to the refinery. We are however not including these developments in our model, until they reach operational stage.

Recommendation

As international oil prices remain stable, domestic OMCs are enjoying increased oil sales. Moreover, increased CPI is also going to aggravate OMC margins. Further, on the back of increased infrastructure development projects, higher HSD consumption will be observed by commercial transportation sector. Hascol's aggressive expansion plan has helped the company to increase its footsteps and give hard time to competitors. We have underweight stance on HASCOL as share is trading above our December 2017 target price of Rs 311/share.


FECTC: Lower Prices Hurting Profitability

Fecto Cement Limited (FECTC) recently announced its nine months financial results for the period ended March 2017 (9MFY17). During this period, the company earned Rs 607 million after tax profit (EPS: Rs 12.11), which resulted in 5% YoY decline, as against Rs 642 million (EPS: Rs 12.79) that it achieved during the same period last year. Despite better sales, the decline in bottom line was attributed to reduced domestic prices, decreased export revenue along with higher effective taxation.

Production Increased To Overcome Enhanced Demand

During nine months tenure, the company produced 575K tons of clinker, up 16% YoY as compared to 497K tons it produced during 9MFY16. Likewise, cement production surged 10% YoY to 600K tons as against 544K tons cement that was produced during the same period last year. The production was enhanced to cater higher domestic demand, where 18% increase from 427K tons to 502K tons was dispatched. This demand was partially offset by lower export where dispatches declined from 119K tons to 98K tons.

Rs in Million 9MFY17 9MFY16 YoY 3QFY17 2QFY17 QoQ

Net Sales 4,006 3,731 7% 1,240 1,467 -15%
Cost of Sales 2,771 2,527 10% 896 986 -9%
Gross Profit 1,235 1,204 3% 344 481 -29%
Distribution Expenses 133 113 19% 38 55 -30%
Administrative Expenses 192 183 5% 58 73 -20%
Other Operating Expense 64 63 2% 18 25 -30%
Other Income 22 11 105% 8 9 -9%
Finance Costs 2 12 -84% 0.3 0.2 25%
Profit before Taxation 865 845 2% 237 337 -30%
Taxation 258 204 27% 80 86 -8%
Profit after Taxation 607 642 -5% 158 251 -37%
EPS (Rs) 12.11 12.79 3.14 5.00
Source: Company reports

North-Based Cement Manufacturers Reached Consensus, Prices Reverted

Since 2017 start, North-based cement producers were in price war for which cement prices discounted ranging between Rs 20-30/bag. The war started when new expansion plant announced discounts to ramp up its sales as its expansion came online. This war is however reached to an agreement after which cement prices have been revised upwards to Rs 535/bag. This price reversal is perceived to bode well for the sector, as the margins are likely to be retained in a slower demand season.

Recommendation

The cement sector is banking on increased domestic demand, particularly in construction, infrastructure and real estate sectors, through PSDP, CPEC and other greater public spending with focus on roads, rail, highways etc. In FY18 budget, the GoP has withdrew fixed tax per unit area and re-imposed normal tax regime, which will to boost the private sector's construction activities. Further, reduction of corporate tax rate to 30% will also bring positive impact on the bottom line. On the flip side, export markets, especially Afghanistan, is under constant pressure amid less retention price coupled with border-related situation as well as increased export commission to dealers. Further pressure will be observed amid increased global coal prices, Rs1.25/kg FED imposition, and continuation of 3% Super Tax. Currently, FECTC shares are trading at Rs 102.06/share, reflecting 42% upside potential, as against our December 2017 target price of Rs 145/share.


NCL: Dividend Income From NCPL - Key Trigger

Nishat Chunian Limited (NCL) recently announced its third quarter financial results for the period ended March 2017 (3QFY17). During this period, the company earned Rs 1,401 million (EPS: Rs 5.83) profit after tax, which resulted in 83% YoY increase, as against Rs 765 million profit (EPS: Rs 3.18) that it reported in 9MFY16. This surge in bottom-line was attributed to 34% increased gross profit margin attributable to cheaper inventory of cotton, and higher other income, up by 34% YoY at Rs 1.06 billion. The company has also booked Rs 173 million export duty drawback.

Net Revenue Surge 16% YoY

IAmid global price fluctuation during 2016, Shell came up with supply chain network internationally in order to overcome inventory losses. The same network is now reaping fruits for the company, where the company posts 109% increase in its gross profit. Gross profit jumped to Rs 4.12 billion versus Rs 1.97 billion in 1QCY16. On the other hand, Shell claimed to bear financing cost on bank borrowings amid Federal Government's delay in paying outstanding amount. As at March 31, 2016, this outstanding receivable has reached Rs 4.64 billion.

Rs in Million 9MFY17 9MFY16 YoY 3QFY17 2QFY17 QoQ

Net Sales 22,069 18,974 16% 7,619 7,553 1%
Cost of Sales 19,803 17,278 15% 6,750 6,952 -3%
Gross Profit 2,266 1,696 34% 869 601 45%
Operating Expenses 860 795 8% 290 305 -5%
Other Income 1,062 795 34% 34 663 -95%
Finance Cost 791 755 5% 298 266 12%
Profit before Tax 1,676 941 78% 315 693 -55%
Tax 276 176 56% 39 133 -70%
Profit after Tax 1,401 765 83% 276 560 -51%
EPS (Rs) 5.83 3.18 1.15 2.33
Source: Company reports

Budget Impact on Textile Sector

In FY18 budget, the GoP extended Rs 180 billion worth textile export package in which significant increase in drawback was announced. Moreover, custom duty and sales tax were also abolished on imported cotton. Similarly, custom duty on man-made fiber, other than polyester, has also been eliminated. Besides, to promote exports, it was also declared that the outstanding sales tax amounts will be duly cleared during July & August, 2017 in order to promote exports. Further, 3% export refinance scheme remains intact; while value-added machinery import will also remain duty free. We project these steps as positive for the sector, where it would save them finance cost through lower borrowing rates, while upgrading their machinery to compete worldwide.

Key Risk Emerge

Increased global cotton demand pushed the prices upwards at US$72 per pound. We believe this uptick will remain denting NCL's profitability going forward. On the other hand, skip of Nishat Chunian power dividend remain key concern but we expect company would announce dividend of Rs 2/share as final dividend which would boost earnings in FY18. Furthermore, minimum wage rate increment to Rs 15,400 along with enhanced turnover tax to 1.25% is going to hurt NCL's bottom line. However, company's 46MW captive power plant is operational, which will enable the company to reduce its energy costs.

Recommendation

Currently, NCL shares are trading at Rs 51.92/share, reflecting 37% upside potential, as against our December 2017 target price of Rs 71/share.


FFBL: 2QCY17 to Post Meager Profit

Fauji Fertilizer Bin Qasim Limited (FFBL) recently announced its first quarter financial results for the period ended March 2017. The company reported Rs 135 million loss (LPS: Rs 0.14), up 74% against 1QCY16 net loss of Rs 514 million (LPS: Rs 0.55). This steep decline was attributed to classification of Rs 1.04 billion DAP subsidy in other income and lower selling prices, despite higher quarterly sales volume. Feed and fuel gas prices remain high contributing to higher cost of production, which could not be passed on to the customers due to capping of fertilizer prices by the government.

Below-Agreed Gas Supply Shed Production

The quarter remained challenging for FFBL, where below then agreed gas supply led to lower production quantities. Hence, the company reported 72k tons of Ammonia (down 19% YoY), 61k tons of Urea (down 34% YoY), and 164k tons of DAP (up 1% YoY) for the period.

Rs in Million 1QCY17 1QCY16 YoY 4QCY16 QoQ

Net Sales 7,999 4,414 81% 22,910 -65%
Gross Profit / Loss -254 -697 64% 880 -129%
Admin Expenses 384 348 11% 615 -37%
Selling & Distribution 917 677 35% 1,383 -34%
Operating Profit / Loss -1,555 -1,722 10% -1,118 -39%
Other Income 1,745 1,253 39% 4,848 -64%
Financial Charges 477 406 18% 582 -18%
Profit / Loss After Taxation -135 -514 74% 2,393 -106%
EPS / LPS -0.14 -0.55 2.56
Source: Company Reports

Heavily Loaded Urea & DAP Market To Pressurize 2QCY17 Sales

Besides lower production, another challenge for fertilizer companies remained urea sale due to supply glut, as major offload was taken place in 4QCY16. As a result, urea prices went below Rs 1350/bag. Amid this price competition, even though FFBL disclosed 7% YoY increase in urea off-take from 35.15k tons to 37.6k tons, coupled with 145% increase in DAP off-take from 70.83k tons to 173k tons, the bottom line remained in loss and is likely to post minor earnings in next quarter (EPS: Rs 0.28). Moreover, the government's decision in FY18 budget to offer imported urea at Rs 1000/bag will further aggravate price competition.

Government's Initiative for Farmers Will Benefit Fertilizer Companies

In FY18 budget, the government proposed agri-financing for farmers on reduced markup rates, while the subsidized electricity tariff for their agri-tube wells will continue as is.

Recommendation

As fertilizer business is undergoing stiff competition, FFBL is becoming more dependent over its diversified investments. We believe that going forward, 118MW coal-fired power plant and increased DAP prices may become beneficial. On the other hand, 1% reduction in corporate tax by the government would bring some relief on FFBL's bottom line. However, 3% super tax imposition for another year and minimum monthly wage increment to Rs 15,000 would offset the result. FFBL share is currently trading at Rs 41.82/share, reflecting 48% upside potential, against our December 2017 target price of Rs 62/share.


SHEL: Impressive Earnings

Shell Pakistan Limited recently announced its first quarter financial result for the period ended March 2017. During the period, the company reported a profit after tax of Rs 1,396 million (EPS: Rs 13.05), as against Rs 21 million (EPS: Rs 0.2) that it reported during 1QCY16. The surge was attributed due to inventory gains owing to global supply chain network through which the company imported products on best available prices and better margin on regulated products.

Gross Profit Jump by 109%

IAmid global price fluctuation during 2016, Shell came up with supply chain network internationally in order to overcome inventory losses. The same network is now reaping fruits for the company, where the company posts 109% increase in its gross profit. Gross profit jumped to Rs 4.12 billion versus Rs 1.97 billion in 1QCY16. On the other hand, Shell claimed to bear financing cost on bank borrowings amid Federal Government's delay in paying outstanding amount. As at March 31, 2016, this outstanding receivable has reached Rs 4.64 billion.

Top Line up 15%

Net sales surge by 15% YoY to Rs 48.92 billion in 1QCY17 from Rs 42.67 billion in 1QCY16 due to higher product prices. Sales volume of the company falls by 7% YoY to 557k tons in 1QCY17 as against 598k tons of sales in 1QCY16. Furnace oil sales down by 44% to 10k tons compared to 18k tons in 1QCY16. Similarly, High Speed Diesel (HSD) sales decrease by 11% to 230k tons in 1QCY17 against 259k tons in 1QCY16 on account of aggressive marketing strategies by competitor.

Rs in Million 1QCY17 1QCY16 YoY 4QCY16 QoQ

Net Sales 48,924 42,676 15% 32,688 50%
Cost of Sales 44,796 40,697 10% 28,926 55%
Gross Profit 4,128 1,979 109% 3,761 10%
Operating Expenses 2,237 2,080 8% 2,470 -9%
Other income 90 167 -46% 236 -62%
Other Expenses 209 13 1456% 135 54%
Finance Cost 51 30 67% 59 -14%
Profit share from Associates 174 139 26% 244 -28%
Profit before Tax 1,896 161 1080% 1,576 20%
Tax 500 139 259% -1,767 128%
Profit after Tax 1,396 21 6467% 3,343 -58%
EPS (Rs) 13.05 0.20 31.24
Source: Company reports

Recommendation

Due to robust price performance, we have underweight stance on the company as company is trading above Dec'17 target price Rs 536/share.


MCB - Poor NII Overshadowed with Better Contribution from Other Income

MCB Bank Limited recently announced its fist quarter results for the period ended March 2017. The bank disclosed an after tax profit of Rs 6.15 billion (EPS Rs 5.52), which reflected 2% YoY growth, as compared to Rs 6.02 billion (EPS Rs 5.41), which it achieved during 1QCY16. Better performance was attributed to 75% increase in non-interest income with major contributions from fees & commissions, capital gains and dividend income. The Board declared first interim cash dividend of Rs 4 per share for its shareholders.

Income Sources Facing Pressure

Interest income was dropped by 2% to Rs 17.32 against Rs 17.61 billion in 1QCY17, mainly due to lower return on earnings assets. On the contrary, Interest expense increase by 21% to Rs 7.58 billion in 1QCY17 against Rs 6.28 billion in 1QCY16 owing to higher deposits. Hence, 1QCY17 observed 14% YoY decline in Net Interest Income from Rs 11.33 billion to Rs 9.74 billion.

Rs in Million 1QCY17 1QCY16 YoY 4QCY16 QoQ

Net Interest Income 9,735 11,325 -14% 10,051 -3%
Provisions -880 -466 -89% 1,510 -158%
Non-Interest Income 5,184 2,958 75% 4,363 19%
Operating Expenses 6,326 5,675 11% 5,994 6%
Profit before Tax 9,473 9,074 4% 6,910 37%
Taxation 3,326 3,057 9% 2,446 36%
Profit after Tax 6,147 6,017 2% 4,465 38%
EPS (Rs) 5.52 5.41 4.01
Source: Company Reports

Deposit Base Observed Growth in Current Account

At the end of 1QCY17, MCB reported 5% QoQ growth in its total deposits, from Rs 781 billion in December 2016 to Rs 819 billion as of March 2017. Major growth was observed in current account that surged 6% from Rs 284.1 billion in December 2016 to Rs 300.5 billion as of March 2017. Savings account also improved 4% from Rs 427.6 billion to Rs 444.3 billion, within the same comparative periods. This led the bank to report 94.3% under CASA mix.

Increased Asset Base Resulted in Enhanced Investment

MCB Bank's total asset base during the quarter jumped 18.5% YoY to Rs 1,247 billion. This helped the bank to increase its investments, and hence it disclosed 34.5% QoQ growth in its investments to reach Rs. 191.66 billion, while advances surged 1.59% QoQ to touch Rs 5.53 billion.

Recommendation

The bank remained busy in the first quarter against NIB bank's acquisition. At earnings front, the pressure remained on MCB due to 45-year low interest rate implementation by SBP. Further, the government also continued 4% Super tax on the banks for the tax period 2017 as well. Under such circumstances, the bank is increasing its dependency towards non-funded income. Moreover, its focus towards controlling write-offs also helped it to record coverage and infection ratios at 89.46% and 5.68%, respectively. Currently, MCB shares are trading at Rs 207.37/share, reflecting an upside potential of around 37% against our December 2017 target price of Rs 285/share. Buy!


PIOC: Volumes Drives Earnings Growth

Pioneer Cement Limited (PIOC) recently announced its nine-month financial result for the period ended March 2017 (9MFY17). During this period, the company earned an after tax profit of Rs 2.4 billion (EPS: Rs 10.56), up 38% YoY as compared to Rs 1.7 billion (EPS: Rs 7.68) that it achieved in 9MFY16.The increase was attributed to 30% increased clinker and cement dispatches. Moreover, reduced power prices accompanied with efficient fuel consumption also helped in bottom line surge.

82% Capacity Utilization Achieved Amid Increased Demand

During 9MFY17, Pioneer cement reported 81.57% capacity utilization, where its clinker production was up 38% YoY from 884k tons to 1,220k tons. This production was effectively converted into sales, where 1,001k tons cement and 268k tons clinker were sold in the domestic market, while 13k tons were dispatched abroad, including India. It is also pertinent to note that its clinker's major client was Fauji cement, which will continue to remain in 4QFY17 as well since its silo plant is still under construction.

Rs in Million 9MFY17 9MFY16 YoY 3QFY17 2QFY17 QoQ

Net sales 8,089 6,832 18% 2,897 2,688 8%
Cost of sales 4,764 4,045 18% 1,686 1,647 2%
Gross profit 3,325 2,787 19% 1,211 1,041 16%
Distribution expenses 46 41 11% 17 14 18%
Administrative expenses 58 58 1% 21 16 32%
Other operating expenses 235 197 19% 92 68 36%
Other income 184 184 0% 79 71 11%
Finance costs 6 16 -64% 3.2 1.5 118%
Profit before taxation 3,164 2,658 19% 1,156 1,012 14%
Taxation 764 913 -16% 258 213 21%
Profit after taxation 2,399 1,745 38% 898 799 12%
Earnings per share 10.56 7.68 3.95 3.52
Source: Company reports

Chinese Firm Awarded New Plant's Installation

During the quarter, PIOC entered into agreement with Chinese firm for additional 8,000 tons clinker per day capacity plant, 12MW WHR plant and 24 MW Coal-Fired Power Plant. We projected commercial operations to get started by FY20 from this plant, with payback period of around 7years, reducing PIOC's exposure to national grid by 65%.

Massive Infrastructural Based Allocations in FY18 Budget

In its FY18 budget, the government had allocated Rs 2.11 trillion for Public Sector Development Programme (PSDP), whereas Rs 180 billion for CPEC-related projects. Special emphasis was given to Dasu Hydro Power Project with Rs 54 billion and Diamer Bhasha Dam with Rs 21 billion under PSDP, while over 60 projects are under CPEC. We expect around 2 million tons of cement consumption per annum over construction of these two dams only. Hence, demand is likely to succeed supply in near future.

Recommendation

PIOC's expansion activities are apparently going to hit the jackpot as evident through 12MW WHR that was installed in 3QFY17 and resulted in 300 basis points surge in margins. Further expansions are also going to be effective during the phase when demand would be at peak. This will help the company to squeeze its payback period. Additionally, clinker sale to FCCL is also continued to be added advantage till FCCL's own plant gets restored. On the flip side, 3% Super Tax imposition and FED increment by Rs 0.25/kg to Rs 1.25/kg may dampen the positives. Currently, PIOC shares are trading at Rs 138.20/share, reflecting 22% upside potential, as against our December 2017 target price of Rs 168/share. Buy!


ENGRO: Focus on Energy Sector to Reap Benefits by CY19

Engro Corporation (ENGRO) recently announced its first quarter financial results for the period ended March 2017. During this period, the company disclosed Rs 2.84 billion (EPS: Rs 5.42), resulting in 23% YoY decline over Rs 3.69 billion (EPS: Rs 6.97) that it achieved during 1QCY16. Net sales observed steep decline, amid lower revenues mainly on account of lower urea sales coupled with discounts to sustain market share. The decline was partially offset through better performance by petrochemicals business, power, LNG and Engro Vopak.

A Supply Glut Still Persist

Industry only managed to export 31K tons urea during 1QCY17 against allocated quota of 300K tons by the Economic Coordination Committee. Overall retained 1,537K tons inventory level for the same quarter. We believe that remaining export will take place in 2HCY17 and hence we may observe recovery in earnings during 2HCY17. Moreover, the measurements by the government in FY18 budget to support farmers will also automatically impact positively on fertilizer companies including EFERT.

EPCL and EPQL Performed Well

Engro polymer & chemical limited (EPCL) posted robust earning growth as profit after tax clock at Rs 845 million (EPS: Rs 1.27) against Rs 17 million (EPS: Rs 0.03) in 1QCY16 owing to higher margin on PVC and better manufacturing efficiencies. Similarly, Engro Powergen Qadirpur Limited (EPQL) witnessed healthy growth of 82% YoY to Rs 845 million (EPS: Rs 1.27) against Rs 17 million (EPS: Rs 0.03) in 1QCY16 owing to higher margin on PVC and better manufacturing efficiencies. EPQL had dispatched a total Net Electrical Output (NEO) of 461 GwH to the national grid with a load factor of 98% in 1QCY17 as compared to 21% in 1Q 2016.

Engro Elengy Terminal Continues Major RLNG Handling

During 1Q'17, the Engro Elengy Terminal handled 16 cargoes vs. 7 cargoes and 999,961 MT of LNG vs. 420,666 MT during comparative period last year. The subsidiary had already received 100% of RLNG regasification nomination by SSGC. Currently, it is finalizing the Addendum to the LNG Operation & Services Agreement (LSA) with SSGC, which will enable it to utilize its spare capacity of 200 MMSCFD. SSGC is already utilizing additional capacity since January 27, 2017.

Energy Footprints Expansion Through RLNG

Engro has recently filed a tariff petition with NEPRA through its subsidiary Kolachi Portgen (Pvt) Ltd (KPL) for approval of US$ 392.3 million; 450MW RLNG based Power Plant at Port Qasim, Karachi. The project may commence operations from CY19 and
will sell 100% of its capacity to KEL for 30 years, as per power purchase agreement. Tariff applications in this regard are pending approval from NEPRA.

Recommendation

Since last year, Engro is in the process of shifting itself towards high yielding businesses. In this regard, its major focus remains energy sector, which is highly in demand. After investment in KPL, the company will still have around Rs 61 billion to invest. On the other hand better polymer business amid recovery in PVC margins and demand are also likely to contribute towards bottom line. Currently, ENGRO share is trading at Rs 343.46/share, reflecting 9% upside potential, against our December 2017 target of Rs 374/share. Hold!


NML: Continuing to Struggle

Nishat Mills Limited (NML) recently announced its nine-month financial results for the period ended March 2017 (9MFY17). During this phase, the company earned Rs 3.08 billion (EPS: Rs 8.78) profit after tax, which resulted in 13% YoY sharp decline, as compared to Rs 3.56 billion (EPS: Rs 10.15) after-tax profit that it achieved during the same period last year. The main reasons for this decrease were attributed to increase in gas prices, increase in minimum wages and decline in profit margins due to competition in textile sector.

Increased Cost of Sales Bashed Gross Profit

Despite 3% increase in net sales during the period, the increased cost of sales by 6% waived the growth and rather pushed the company to announce 15% decline in its gross profit. This decline was due to suppressed first quarter of the textile industry. This was partially offset by better performance in value added sectors during later six months.

Rs in million 9MFY17 9MFY16 YoY 3QFY17 3QFY16 YoY

Net Sales 37,287 36,196 3% 13,283 12,704 37,287
Gross Profit 4,198 4,927 -15% 1,563 1,836 4,198
Operating Expenses 2,666 2,465 8% 946 818 2,666
Other Income 2,907 2,713 7% 312 454 2,907
Finance Cost 670 813 -17% 249 260 670
Profit after Tax 3,089 3,567 -13% 538 1,007 3,089
EPS (Rs) 8.78 10.15 1.53 2.86 8.78
Source: Company Reports

Export Refinance Scheme Persists

In FY18 budget, the government maintained 3% export refinance scheme. Further, zero rating for exporters also continued. Besides, the finance ministry also extended duty free machinery import. We believe these steps would save finance cost of the company.

Sales Tax Refund Clearance Latest by August 2017

FY18 budget also covered sales tax refund concerns that increased borrowing costs of the companies. In this regard, the government committed to clear its dues in two phases namely July and August 2017. Further, it also introduced 5% RD on synthetic filament yarn import, in order to promote domestic yarn.

Recommendation

In the event where couple of positive steps taken by the government in FY18 budget, the negative concerns remained minimum wage increase to Rs 15,000. Further, increase in minimum turnover tax rate from 1% to 1.25% will also impact the bottom line of the company's financial statement. At company's end, NML is shifting its 49,536 spindles' spinning unit to Special Economic Zone, which is anticipated to start production by August 2017. Its 56 wider width Picanol looms are also likely to start work by June 2017 in the weaving unit. Meanwhile, a project for the installation of a new 65 ton coal fired boiler at power plant located at Nishat Dyeing & Finishing unit is also under planning process. These developments are likely to bring down the cost of doing business. Currently NML shares are trading at Rs 160.29/share, reflecting 7% upside potential, as against our December 2017 target price of Rs 171/share. Hold!

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