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| Reinstate at Underperform on weak earnings outlook |
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Reinstate at Underperform;PO of PRs7.32 implies downside
We reinstate coverage of Pakistan's sole PTA (Pure Terephthalic Acid) producer, LOTPTA, with U/P rating. Despite underperforming the KSE-100 by 36% YTD, the firm trades at a 16% premium to our Pakistan universe 2013E P/E of 5.68x. Premium valuations are unjustified, in our view, on falling margins and earnings, downside risk from margin/demand, and dim prospects for growth on expansion. Thus we expect LOTPTA to underperform the broader market going forward. Our PO of PRs7.32 is based on a trough P/B of 0.7x for 2013E core BPS & net cash of PRs2.27.
PTA-PX margins to remain weak in 2012
PTA-PX average margins are down 45% YTD vs 2011 and we expect them to fall another 20% in 2H12 vs 1H12 on potential capacity additions and a weak demand outlook. We recently cut PTA-PX primary margins for 2012E by 21% to US$115/t vs US$226/t in 2011 taking into account weaker-than-expected 2Q margins and the cut in our China GDP growth forecasts. We thus expect EPS to contract from PRs2.76 in 2011 to PRs0.41 in 2012E then climb to PRs1.19 in 2013E.
Expansion unlikely without increase in PTA duty
With no rise in PTA import duty (3%) in the recently announced budget, and weak demand/supply dynamics and margin outlook, we think LOTPTA is unlikely to go ahead with its expansion plan, limiting prospects for long-term sales growth.
Risks
Upside risks to our call are (1) better-than-expected margins, (2) higher-than-expected rupee devaluation and (3) value-additive diversification.
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