KARACHI, March 9: Nearly everyone agrees that at Rs24.50, the share in Dewan Salman Fibre (DSFL) is expensive. In just over two months from January 1, this year
, the DSFL stock has gained Rs5.30 or about 28 per cent; it is now trading at Rs24.50, compared with Rs19.20 at the start of the year.
On the prospective financial year 2004 earning per share (eps) at Rs1.20, the share is now trading on a price-to-earnings (p/e) multiple of 20x. This is twice the KSE-100 multiple of 10x.
The gratifying fact, nonetheless, is that during the first half of the FY04 - the results for which have recently been released - the company reported net profit in the sum of Rs172.6 million, which was nearly 12.5 times the after tax profit of Rs14 million in the corresponding period of the previous year.
Major sources of improved profitability during the period under review were 10 per cent growth in sales to Rs8.5 billion over the same time last year. This was owing to increase of Rs7 per kg in domestic prices of PSF.
The local prices of PSF shot up to Rs70 per kg from Rs63 per kg in 1QFY04. "In order to break the over capacity situation in the PSF industry, DSFL had made few inroads in the export market of Syria", said Faisal Shaji, analyst at Capital One Equities.
He observed that the loss-making unit of Acrylic also found a long-term foreign buyer in the shape of Iranian carpet industry, which had helped in sales of the unit to crawl up.
Conversion to gas also had positive effect on the bottom line. But a major reason for improved profitability in the period under review was the huge drop of 32 per cent in financial charges.
The company had started to enjoy the impact of re-pricing of many short term loans viz. bullet loans, R/F & LC discounting which were negotiated at a low of 3 to 4 per cent by the company in January of 2003.
Mohammad Sohail, head of research at InvestCap, in his extensive report on the PSF sector, pointed out that DSFL was able to start the year on a firm note as PSF prices did not fluctuate too violently and debt issued had been resolved except for the two fixed-rate TFCs about which nothing could be done till they matured at the end of FY04 and FY05.
Invest Cap stated that though DSFL held fibre producing capacity of 38 per cent which was the highest in the country, a fierce competitor - Ibrahim Fibres - was giving it the jitters.
Ibrahim was said to have an edge with its lowest conversion cost among the big three PSF producers (Dewan, Ibrahim and ICI). DSFL's most recent expansion, a 20 thousand tons per annum speciality fibre plant had begun commercial production from January 2004.
The plant cost Rs0.9 billion and was financed mainly through debt. The company had recently dispatched some of its speciality fibre samples to markets in the EU, and was waiting to receive a feedback in 2-3 months.
Holding high hopes of a positive response, DSFL hoped to begin exports, which would help the company earn improved margins as compared to exports of semi-dull PSF.
DSFL was also in the process of streamlining its proposed Rs400 million preferred stock, approved by the KSE on August 29, 2003. When the issue enters the market it would shave away Rs34 million per year or Rs0.1 per ordinary share, from future net profit, which otherwise would have been the common shareholders' due.
DSFL was likely to derive benefits from its strategy of lowering costs, including conversion of its PSF plants to gas from expensive fuel oil. Analysts expected a Rs0.6 to Rs0.7 per kg reduction in cost of conversion as a result of shift to gas.
For all its leap out of the red, Asif Ali, analyst at First Capital thought that the company would have made more in profit but for the severe blow that its cost of inventories had to suffer due to continued increase in MEG and PTA prices in 2QFY04.
"Price of PTA had risen to $700 per ton from $585 per ton in 1Q and MEG prices reached $850 per ton from $620 per ton in 1Q", said the analyst and added that the company's margins had weakened because of exports, as margins are lower in foreign sales.
