DOL shows promising growth potential
Falling RLNG rates provide a boost
Descon Oxychem Limited (DOL) is set to benefit from a significant reduction in RLNG (Re-gasified Liquefied Natural Gas) rates. These rates have decreased by 37% from their peak levels in 2022. This reduction, coupled with continued low global oil prices, is expected to lower production costs for DOL.
WACOG pricing to enhance profitability
The implementation of Weighted Average Cost of Gas (WACOG) pricing under the new IMF program could further reduce DOL’s gas costs by 12-15%. Since RLNG constitutes a major portion of the company’s raw material costs, this change is poised to significantly improve DOL’s profitability.
Market share and new export markets
DOL has increased its market share to 64%, up 15 percentage points since 2019. This growth is attributed to the depreciation of the Pakistani Rupee, which made imports less attractive, and operational issues faced by its competitor, Sitara Peroxide. Additionally, DOL is exploring new export markets, which could alleviate domestic supply issues and support price stability.
Financial performance and stock potential
Despite underperforming the KSE100 index by 99 percentage points over the past year, DOL is projected to recover with an expected 62% increase in earnings by FY25. This recovery is driven by higher sales and improved margins.
Key Financial Metrics
| Metric | FY22A | FY23A | FY24E | FY25F | FY26F |
|---|---|---|---|---|---|
| EPS (PkR) | 2.7 | 8.0 | 2.8 | 4.6 | 4.9 |
| EPS Growth | 69% | 197% | -65% | 62% | 8% |
| DPS (PkR) | 2.0 | 4.0 | 1.0 | 2.0 | 2.0 |
| Dividend Yield | 9% | 19% | 5% | 10% | 10% |
| P/E (x) | 7.8 | 2.6 | 7.2 | 4.5 | 4.1 |
| EV/EBITDA (x) | 4.3 | 2.2 | 3.5 | 2.3 | 1.9 |
| ROE | 20% | 46% | 15% | 21% | 20% |
Shareholding Structure
| Category | The share outstanding (mn) |
|---|---|
| Associated Co, Undertakings & Related Parties | 73% |
| Mutual Funds and Mudarabas | 3% |
| Insurance Companies | 0% |
| BDFIs and NBFIs | 1% |
| Others | 4% |
| Estimated free float | 30% |
| Share outstanding (mn) | 175 |
Energy costs are on the decline
With RLNG prices down by BMA Research from their peak, the cost of production for hydrogen peroxide, which heavily relies on RLNG, is expected to decline. This reduction in energy costs is likely to improve DOL’s margins.
Operational advantages over competitors
DOL’s main competitor, Sitara Peroxide, has been facing significant operational issues, reducing its production by 50% over the past two years. DOL has capitalized on this by maintaining its production levels and increasing its market share.
Future growth projections
DOL is expected to see a three-year earnings compound annual growth rate (CAGR) ofBMA Research, driven by improved local demand, increased export volumes, and a recovery in hydrogen peroxide prices. The company’s strong market position allows it to pass on cost increases to customers, helping to maintain its gross margins, which have averaged 25% over the past decade.
Projected Financial Performance
| Metric | FY22A | FY23A | FY24E | FY25F | FY26F |
|---|---|---|---|---|---|
| Sales (PkR mn) | 4,250 | 6,721 | 5,775 | 6,096 | 6,660 |
| Gross Profit | 1,102 | 2,756 | 1,047 | 1,564 | 1,670 |
| Admin Expenses | 126 | 173 | 176 | 181 | 198 |
| Selling Expenses | 74 | 211 | 102 | 106 | 116 |
| EBITDA | 1,206 | 2,640 | 1,270 | 1,733 | 1,852 |
| Finance Cost | 53 | 26 | 28 | 18 | 13 |
| Profit after Tax | 471 | 1,401 | 495 | 803 | 864 |
| EPS (PkR) | 2.7 | 8.0 | 2.8 | 4.6 | 4.9 |
| DPS (PkR) | 2.0 | 4.0 | 1.0 | 2.0 | 2.0 |
Conclusion
Descon Oxychem Limited is poised for growth with significant potential for profitability due to falling RLNG rates, the implementation of WACOG pricing, increased market share, and new export markets. The company’s strong market position and financial projections indicate a promising future.
Disclaimer:
The information in this article is based on research by BMA Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.
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