omc: no mention; hence safe - BMA Capital Management

BUY
Fair Value: PKR 177
Current Price: PKR 133
Stock Statistics
Ticker ICI
3-month High/ Low 166.3/125.6
Mkt Cap USD mn 218
12M ADT mn 0.2
Beta 0.96
KSE vs ICI Relative Graph
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Volume mn(RHS) ICI KSE100
Jun-09
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ICI Profile: ICI manufactures and sells
a wide range of industrial and consumer
products in Polyester, Soda Ash, Paints,
Chemicals and Life Sciences segments.
A partnership with AkzoNobel, world's
largest decorative and performance
coatings company, has further added to
ICI's operational and product efficiencies
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ICI Pakistan: Go for it!
Investment Summary
June 7, 2010
� A downtrend at the KSE in recent months pulled down ICI’s stock price to
PKR133/share from its high of PKR181/share in Feb10. However, we
believe that the stock is significantly undervalued at current levels; we have
a DCF-based fair value of PKR177/share for the stock reflecting 33%
upside from current levels
� Diversified Businesses: ICI Pakistan stands to benefit from its strategy of
diversification in its product portfolio and offers high-margin products
including paints, life sciences products and chemicals. Simultaneously, it is
a market leader in Soda Ash and Polyester Staple Fibre (PSF) in Pakistan.
The company’s revenues have increased at a 3yr CAGR of 7% to CY09
while its gross margins have remained in the vicinity of 20%. Given the
diversification in business activities we expect ICI to show a consistent
growth in its sales and profits going forward.
� PSF – the Revenue Driver: PSF contributes 49% to the company’s total
revenue while it earned a gross margin of 9% for the company in 1QCY10.
ICI is the second largest producer of PSF in the country after Ibrahim Fibres
(IBFL). PSF prices averaged at PKR133/kg in the 1QCY10 while after
increasing to PKR138/kg in May10 it has come back to PKR134/kg at
present. The onset of summer season and 15% RD on yarn exports during
the quarter are the key reasons for a slightly subdued demand for the
product during the ongoing quarter leading to a decline in its prices.
However, peaking cotton prices have lately led spinners to tilt their mix
towards polyester for blended yarn. Therefore, we believe ICI’s PSF
segment would continue to benefit from high utilization rates and a regular
clientele going forward. Also, expected declines in the prices of its raw
materials including PTA and MEG are expected to lead to better margins for
the company in case PSF prices also hold strong during the same period.
� Soda Ash – ICI, the market leader: Soda Ash is the second major
contributor to ICI Pakistan's revenue and also yields margins around 30%.
However, in 1QCY10 the segment’s gross margin drastically dropped to 8%
on the back of high costs of energy. We believe ICI would continue to
benefit from stability in its soda ash sales in CY10 on the back of consistent
demand from the downstream industry in the local as well as export
markets.
� Prudent Cash Management: One of the key stones for ICI has been its
low debt levels and adequate management of its working capital
requirement. Improving cash balance (PKR3.6bn as of Mar10) has led to an
improvement in ICI’s other income to PKR144mn in 1QCY10 compared to
PKR41mn in the same period last year.
Financials
CY09A CY10E CY11E CY12E
EPS(PKR) 14.7 16.4 20.3 23.9
Price to Earnings (x) 9.0x 8.1x 6.5x 5.6x
Dividend Yield (%) 6% 6% 8% 8%
EPS Growth (%) 10% 11% 24% 18%
Return on Equity (%) 14% 15% 16% 17%
Return on Assets (%) 10% 9% 11% 12%
Source: BMA Research