AKD Quotidian about — ICI: New ownership, renewed optimism

Karachi, June 07, 2013 (PPI-OT): AKD Securities initiates coverage on ICI Pakistan Limited (ICI) with a DCF based Jun’14 target price of PkR22Bishare, implying 38% upside from current levels.

According to AKD Securities investments case is premised upon 1) anticipated group synergies following ICI’s recent acquisition by the Vunus Brothers Group (significant presence in the textile space), 2) the company’s strategic shift to coal-fired boilers which will yield substantial cost savings and 3) expected priority focus by the incoming government on the power sector which should in time prove beneficial for the downstream textile industry thereby enhancing demand for ICI’s products.

With the first phase of the coal boilers project expected to come online by mid-2013 (at Khewra soda ash plant), ICI’s recent announcement of shifting its accounting year to FY basis implies that forward valuations (FYI4F PIE: 9.27x and FYi 5F PIE: 6.33x) are attractive. Going forward, AKD Securities believes plans to shift to coal at the Sheikhupura PSF plant will add to the medium-term earnings growth momentum, justifying slightly premium FYI4F PIE multiples. Buy!

 IC - Segment Wise Break Up

 (NCR rim)                  CYIOA    CYIIA    CYI2A    FYI3F    FYI4F
 PSF            Net sales   17,981   21,019   18,204   19,443   19,637
        Operating Profit    2,022      901    (146)     (22)      124
 Soda Ash      Net sales    6,463    6,854    7,604    7,848    8,485
        Operating Profit      895      936      803      797    1,955
 Life Sciences Net sales    3,761    4,774    5,492    6,091    6,747
        Operating Profit      439      520      548      681      776
 Chemicals     Net sales    2,661    3,177    3,422    3,220    3,761
        Operating Profit      223      330      294      268      233

Source: Company Reports and AKD Research

PSF – Poised for turnaround! The PSF segment is the largest revenue generator for CI, contributing 52% to the top-line in 2012. Last year however, the division posted an operating loss due to low downstream demand and a decline in PSF primary margins by US$97/ton to US$460/ton. In the near term, competitive pressures may intensify due to IBFLs recent expansion, however downward sticky cotton prices coupled with expectation of improvement in energy supplies to the downstream textile sector are likely to drive demand for PSF going forward.

The key profitability driver for the PSF division will be the investment in a coal fired boiler, which is being installed at an estimated cost of PkR1lbn and expected to come online in the first half of FY15. AKD Securities expects significant fuel cost savings to result in margin accretion and lead to an average EPS impact of -PkR6/share from FY15 onwards.

Soda Ash – coal cost savings! At 350k tons, ICI has the largest installed capacity of soda ash in Pakistan with the division accounting for 54% of ICI’s operating profit in CY12. In the immediate term, the company is in the midst of migrating to coal-fired boilers at its soda ash plant in Khewra, which is expected to cone online in 1QFY14, where AKD Securities expects coal cost savings as well as higher plant utilization levels to nearly double FY14F earnings for Id.

Going forward, AKD Securities sees improvement in local demand for soda ash, due to the recent float glass capacity expansions by Ghani Glass and Tariq Glass as well as potential uptick in construction activities. With increased utilization levels, ICI can also cater to export demand for soda ash going forward.

Life Sciences and Chemicals: Change is afoot at the life sciences division where CI is looking to further develop its in-house brands portfolio while targeting expansion through acquisition. In this regard, Cl’s recent appointment of Mr. Asif Jooma as CEO should prove particularly useful given his strong linkages to the pharmaceutical industry. At the sairie time, the company’s chemical division should derive synergies from the group’s textile exposure.

Investment Perspective: AKD Securities has valued ICI on discounted cash flows. Taking into account the planned switch to coal in both the Soda Ash and the PSF divisions, AKD Securities expects annual earnings growth to average at 55% over the FY14F-FY16F period. id is trading at FY14F and FYi SF PIE multiples of 9.27x and 6.33x and offers healthy upside of 38% to , AKD Securities Jun’14 target price of PkR228/share. Buy!

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