January 10, 2019 (MLN): With the materialization of recent downward revision in Liquefied Natural Gas (LNG) rates, Mr. Asad Ali, Research Analyst at BMA Capital Management Limited has shared his belief in a research note, that this development will benefit the Hydrogen Peroxide producers the most, given their considerable reliance on gas for production.
For January 2019, Oil & Gas Regulation Authority (OGRA) has revised down LNG rates by approximately 10.5% from December 2018 levels, to stand at USD11.038/MMBtu and USD11.3726/mmbtu for SNGPL and SSGC, respectively, as Brent oil corrected by 10% to an average of USD68/bbl during 4QCY18 compared to 3QCY18.
Speaking to Mettis Link News, Mr. Ali explained that as per an official formula, LNG prices in Pakistan are set at around 13.7% of oil prices, which means a price adjustment in oil in future will also impact LNG prices.
“Since gas is a primary raw material for H2O2 (approximately 23% of total cost of production), the revised rates should taper off cost pressures and help bump up profitability,” he opined.
Moreover, rough estimates calculated by Mr. Asad suggest that the notified drop of USD1.26/mmbtu may translate into earnings impact of PKR0.3/sh (6% of FY19E earnings) and PKR0.4/sh (9% of FY19E earnings) for Descon Oxychem Ltd (DOL) and Sitara Peroxide Ltd (SPL), respectively, on annualized basis.
“Since the LNG prices carry a lag and oil currently trades at USD58/bbl, another downward revision of LNG prices to the tune of USD1.2-1.5/mmbtu cannot be ruled out,” he deduced.
In CY18, prices ballooned domestically from PKR55/kg to PKR105/kg during 1H supported by: (i) 33% devaluation (since Nov’17), and (ii) presence of antidumping duty on imports originating from Bangladesh.
However, recommencement of shut capacities in the latter half of CY18 stabilized the supply dynamics causing the prices to cool off.
Earnings outlook: Although domestic H2O2 producers are not under our formal coverage, BMA Capital’s back of the envelop calculations suggest DOL may post EPS of PKR5.1/sh in FY19 implying P/E of 6x. “Similarly, SPL may indicate EPS of PKR4.2/sh in FY19 implying P/E of 7x. Average correction of 16% in stock prices in the past 2-mths of H2O2 producers dictates concerns on the product prices, however, we argue that lower cost pressures can partially address investor concern on margin decline,” concluded the report.
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