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.