Pearl Securities Limited – Chemicals in Focus

Karachi, December 22, 2014 (PPI-OT): Synopsis

Dawood Hercules Corporation Limited (DAWN), an investment holding company with associated business interests in a variety of economic sectors, the most prominent being in the chemical and power sectors.

Stand Alone (SA) accounts show strong net earnings growth of 34% YoY during 9M CY14. Earnings growth is facilitated by strong dividend income from associate companies, primarily from the Engro Corporation (ENGRO).

In Consolidated accounts (CS), bottom line has declined by 43% YoY during the same period due to continues production losses in wholly owned subsidiary company, DH Fertilizer Limited.

SA earnings improve on better dividend income

During the 9M term of CY14, the corporation’s Top-Line, which is dividend income from associate companies, grew substantially to PKR 1.49bn, 62% YoY greater than dividend income collected in the same period last year.

Strong dividend income is primarily from Engro Corporation, amounting to PKR 1,385mn, 93% of total income, while HUBCO provided the remaining PKR 99mn or 7% of total income. Dividend income from ENGRO is including receipt of one share of EFERT for every 10 shares of ENGRO as special dividend which amounts to PKR 1,045mn, 70% of total dividend income or 75% of income provided by Engro Corp.

Finance costs increased to PKR 98mn, up by 120% YoY due to rise in short term commitments by Jun’14 end. Other loss of PKR 91mn was incurred which provided some pressure to earnings.

Overall net income for the term is recorded at PKR 937mn (EPS: PKR 1.95), an increase of 34% YoY against income of PKR 701mn (EPS: PKR 1.46) in the same term last year.

CS accounts downgraded due to DH Fertilizer production losses

The Dawood Hercules consolidated Group accounts (CS) include wholly owned subsidiary company, DH Fertilizer Limited, which has performed poorly. Performance by DH Fertilizers has suffered due to unavailability of gas supply which resulted in plant closure for majority of the period under review.

Overall the fertilizer business has only received 30 days of gas supply in the entire 9M term. Due to maintained gas shortages in the past, DH Fertilizer Limited has sustained continuous production losses since 2010. In 9M CY14, DH’s urea production declined by 56% YoY while volumetric sales declined by
54% YoY.

In large part due to poor performance of subsidiary company, overall DAWH consolidated accounts show bottom line decline of 53% YoY with PAT at PKR 1.55bn (EPS: PKR 3.21) in 9M CY14 against net income of PKR 2.69bn (YoY). Top-Line has declined substantially by 37% YoY, gross margins decline by 1222bps YoY while indexation effects cause additional pressures.

SA operations to receive strong dividend income in 1QCY15

Dividend income is expected to improve in coming terms looking at improved performance of two associate companies, HUBCO and EFERT. Engro Fertilizer has completed debtor requirement of repayment of 33% of loan before dispatching dividends to investors. With solid performance, EFERT is expected to pay cash dividend of PKR 1-2/share with final yearend results.

HUBCO’s performance has improved after major overhaul of generation plant, which could entertain cash reward of PKR 2.5-3/share at HY end. Engro Corp’s consolidated accounts are expected to suffer due to depressed margins in the food and polymer segments and loss incurred in its rice business despite strong fertilizer performance. Overall solid dividend income to DAWH can be expected in 1QCY15.

9M CY14 Stand Alone accounts Summary – Earnings up 34% YoY

Strong dividend income from associate companies has allowed the corporation to achieve solid bottom line growth. Some stress to earnings is seen by rising finance costs and other loss incurred during the term.

Top-Line has improved by 62% YoY to reach PKR 1.49bn.

Other loss of PKR 91mn was incurred against other income of PKR 45mn.

Finance costs increased to PKR 98mn, up by 120% YoY.

Finance stress to subside in final quarter

The corporations SA balances show, short term borrowing decline by 61% QoQ to reach PKR 508mn against PKR 1,297mn by the end of Jun’14. Reduced financial pressure from bottom line will help complement dividend income.

Operation details

Dawood Hercules is a holding investment company, with associate companies such as Engro Corporation, Hub Power Company as well has a wholly owned subsidiary, DH Fertilizer Limited. DAWH has indirect holding of Engro Fertilizer, Engro Foods and Engro Polymer through shareholding in Engro Corp. The principal activity of the company is to manage investments in its subsidiary and associate companies. The firm’s registered office is located in Karachi.

Company Outlook

In SA accounts, better dividend income is expected to associate company’s, primarily from EFERT through Engro Corp and HUBC. Finance burden is expected to be downgraded in the final quarter. Consolidated operations are expected remain under pressure due to sustained gas curtailment of subsidiary company. At current, the company is trading at premium of 12% from its TP of PKR72 with less attractive dividend yield of 12% (CY14E). Hold

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