DYNO appears attractive on lower Urea prices
- We believe, Dynea Pakistan (DYNO) can potentially outperform at the bourse in the near term given that Urea is a key raw material for the company.
- Urea is used in its Resin division (which produces urea/melamine formaldehyde and formaldehyde), which accounts for 46% of its revenues.
- Recall that as a result of budgetary measures, Urea prices have come down from Rs1,780/bag to 1,400/bag (down 21% YoY).
- Our back of the envelope working suggests that, if lower prices are not passed on to the consumers, company’s gross margins can increase to 18% in FY17F from 16% in 9MFY16. As a result, earnings can potentially jump to Rs8.5/share in FY17F from FY16E earnings of ~Rs6.5/share (9MFY16 earnings at Rs4.88/share).
- As current prices, DYNO trades at a very cheap FY17F P/E of 6.8x vs. chemical sector’s average P/E of ~11x. Applying a 10x P/E multiple, Fair Value for DYNO stands at ~Rs85. A potential upside of 46%. DYNO also potentially offers a FY17F D/Y of 12%.
- The company has also scheduled its board meeting to announce its FY16 results on August 27, 2016.