Karachi, August 31, 2021 (PPI-OT): SITC: Diversifying into new ventures
The company currently manufactures caustic soda (capacity: 202K MT; capacity utilization: 66% in 2019) and allied products including Sodium hypochloride, hydrochloric acid and chlorine gas, with capacity utilization at 64/30/69%, respectively in pre-COVID’19. Major competitors include Engro Polymer Chemicals Ltd and Ittehad Chemicals Ltd, with SITC leading the market. The revenue mix is: 80/20% caustic and allied chemicals/yarn and fabric, respectively.
Our liking for Sitara Chemicals Industries Ltd (SITC) is based on presence in wide variety of chemicals segments, and venturing into newer verticals including soap noodles (34K MT; CoD 4QFY21) and Linear Alkyl Benzene Sulphonic Acid (LABSA – 30K MT). The company also has plans to establish another coal fired power plant of 40MW, where we estimate current electricity requirement for caustic soda production at 55MW. Current fuel mix is 70/30% coal/gas.
At US$ PkR exchange rate of 164, assuming LAB into LABSA conversion ratio of 0.64x and primary margins at US$190/MT, even 50% utilization of LABSA capacity will translate into earnings impact of PkR15.90/sh on commissioning. Total CAPEX required for the LABSA and coal power plant amounts to PkR6bn approximately (current D/A of the company stands at 30%).
SITC has posted 9MFY21 NPAT of PkR1.07bn (EPS: PkR49.91) vs. 9MFY20 NPAT of PkR371mn (EPS: PkR17.31), driven by 15%YoY higher revenues, 4ppt YoY higher gross margins of 23%, and 44%YoY decline in finance cost. The company is trading at a FY21 P/E of 5.09x, vs. KSE-100 trading at 6.2x, implying an upside of 24% at last close. Upcoming expansions are expected to unlock further upside potential.
JVDC: Real estate prices flooding valuations!
Even though the topline of the company has been on a declining trend, a number of triggers await in the form of i) company launching new phases of Naya Nazimabad soon, ii) Naya Nazimabad being qualified for mortgage financing under Mera Ghar – Mera Pakistan, iii) company successfully landing contracts for new projects including Ravi Riverfront Urban Development Project, and iv) increasing real estate prices.
The company is essentially a real estate play with the principal business of the company being developing and selling real estate projects. The recently provided amnesty scheme to real estate sector has fueled real estate prices to multi-year highs, depicted by Zameen.com’s price index for Karachi increasing by 27% since Mar’20. The same is expected to aid JVDC as it plans to soon launch a new phase while as per news reports, company is also planning to launch 3000 apartments which will provide further impetus to topline. Moreover, currently the gross margins of company stand at 80% while net margin stands at 24%, however with increase in prices, company will be able to sell previously acquired land and previously developed real estate at much higher prices. While on the other hand, demand is still expected to remain strong where being qualified for mortgage financing under Mera Ghar – Mera Pakistan allows consumers to avail subsidized financing for purchase of new houses/apartments.
As a next step, company is moving towards developing new projects which includes Ravi Riverfront Urban Development Project (as per news reports), particularly in the backdrop of booming construction sector. On the other hand, low interest rate environment has really helped mortgage financing to take off. To highlight, Ravi Riverfront Urban Development Project is a flagship project of the current government, with an aim to construct a 100k acres planned city and the rehabilitation of the Ravi River into a perennial freshwater body.
TOMCL: Largest meat exporter venturing into new avenues
The Organic Meat Company Limited (TOMCL) is country’s largest meat exporter, exporting to markets in Middle East, USA, Far East and CIS regions. The company counted UAE as its biggest exporting destination, contributing ~72% to its volumetric sales.
Company recently accorded approvals from Chinese authorities over the export of meat to mainland China. This is potentially a significant trigger for company as China is the largest meat importer of the world (market share of 29.7%) as per USDA’s latest report. Currently, Pakistan’s market share in Chinese meat imports is negligible with China importing meat from countries like Brazil and Australia. Also, the Pakistan meat’s landed costs in China will likely be competitive as compared to Australian and Brazilian meat given lower freight costs.
Furthermore, the company has various growth projects in pipeline which are expected to come online in near future. Firstly, the commencement of Korangi offal project (capacity: 10 ton frozen meat per day), where the company is developing a cold chain management, has achieved completion and the operations will officially begin from Oct’20.
Secondly, the calf fattening business (backward integration) for the supply of up-to 2500 animals also commenced its operations which is expected to increase the margins and help smooth out supply side disruptions.
Finally, owing to significant depreciation of PkR against USD, the margins are expected to improve as 94% of company’s topline is USD denominated. The company trades at P/E multiple of 16.9x.