By: Topline Securities (Private) Limited
Following the announcement of financial results for 2016 and recently held analyst briefing, we have revisited and revised up our EPS estimates to Rs10.8, Rs 12.5 and Rs13.9 for the year 2017, 2018 and 2019, up 33%, 32% and 30%, respectively. We reiterate our ‘Buy’ stance on the scrip, with a new target price of Rs135.
Revisions in our earnings estimates stem from upward revision in our volume assumptions for air conditioner sales and deep freezer sales, while lower effective tax rate of 18% on the back drop of tax shield amounting to Rs3.8bn will further provide support to the company’s bottom line.
PAEL’s appliances sales mix is dominated by the ‘Refrigerator and Deep freezer’ segment, contributing 90% to the appliances' revenues. We foresee the segment to post a 3 year (2017-2019) sales CAGR of 25%. At present, refrigerator penetration in Pakistan stands at 43% compared to the world average of 85%, depicting a significant potential to generate considerable demand. Accordingly we expect refrigerator sales volumes to grow at a 3 Year (2017-2019) CAGR of 12%.
We have revised up our assumption for deep freezer sales to 100K units in 2017, where we foresee deep freezer sales to grab a pie of 17% by 2019 in appliances sales mix as compared to the current share of 9%.
To point out, air conditioner sales stood at ~32k units in 2016, up 70% YoY, while the management stated that the segment has already managed to sell this much units in 1Q2017 where recently introduced inverter air conditioners with heat and cool function gained positive reception from the costumers (85% of the current air conditioner sales mix). We foresee, air conditioners sales to clock in at ~90k units in 2017 and post a 3 year CAGR (2017-2019) of 51%.
FINANCIAL RESULT FOR THE FIRST QUARTER ENDED 31/03/2017
(UNCONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 920.269
(UNCONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 683.191
EPS = 1.35
FINANCIAL RESULT FOR THE FIRST QUARTER ENDED 31/03/2017
(CONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 1396.074
(CONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 1105.206
EPS = 2.20
Result Previews: 1HCY17
PAEL –EPS to show a growth of 35% QoQ
We expect the company to post PAT of PKR 1,486mn translating into EPS of PKR 2.99 during 2QCY17, up by 35% QoQ. This is attributable to a 17% QoQ rise in net revenue led by appliances segment on the back of robust sales of both air conditioners and refrigerators. Moreover, GM’s are expected to remain robust at 31%, flattish on a QoQ basis. Finance cost is expected to decline by 16% QoQ due to lower banking and commission charges. Our estimates also incorporate impact of super tax (PKR 0.25/sh). During 1HCY17E, PAEL’s bottom-line would clock-in at PKR 2,590mn (EPS: PKR 5.20) compared to PKR 2,265mn (EPS: PKR 4.55) up by 14% YoY. Alongside the result, the company is anticipated to declare a divided of PKR 1.50/share.
As per latest result announcement, Pak Elektron Limited (PAEL) has posted earnings of PKR 1,626mn (EPS: PKR 3.24) vis-à-vis PKR 1,734mn (EPS: PKR 3.46) in SPLY. This took profitability over the half year period to PKR 2,731mn (EPS: PKR 5.44), depicting a rise of 21% YoY.
PAEL recorded net revenue of PKR 10,515mn during 2QCY17 which is up by 2% YoY, in-line with our expectations. The meager growth in topline is owed to huge discounts allowed to customers that subsided the impact of volumetric sales growth.
Gross margins for the period dwindle by 170bps compared to SPLY attributable to higher discounts offered by the company in its applainces products.
Meanwhile, Finance cost portrayed a decline of 21% YoY to PKR 338mn due to lower banking and commission charges.
Effective taxation clocked-in at 12.3% during the said period (2QCY17: 11.6%).
FINANCIAL RESULT FOR THE HALF YEAR ENDED 30/06/2017
(UNCONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 1,126.328
(UNCONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 1,015.609
(UNCONSOLIDATED) EPS = 2.00
(CONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 3,249.829
(CONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 2,730.826
(CONSOLIDATED) EPS = 5.44
DIVIDEND = 15%
BOOK CLOSURE FROM 11/09/2017
BOOK CLOSURE TO 17/09/2017
We revise downwards our Jun’18 target price for Pak Elektron Limited (PAEL) to PKR117.1/share,offering an upside potential of 52%. Our reviewed investment thesis is premised on i) revenue growth expected at a 3-yr CAGR of 20% amid boost in the volumetric growth in Appliances, and subsequently ii) 3-yr projected earnings CAGR at a robust 19%. We expect earnings in CY17E / CY18F to clock-in at PKR 4,087mn / PKR 5,308mn i.e. EPS of 8.13 / 10.58.The stock is currently trading at CY17E and CY18F PE of 9.4x and 7.3x, respectively.
Ample growth in volume and price during 1HCY17 depict highest ever sales of PKR 19.65bn compared to PKR 13.24bn in 1HCY16 (up by 48.40%YoY), contributing 76% to the total gross revenues. We owe significant spurs in consumer-led appliances demand to visible macro-economic performance and rising income per capita. In particular, air conditioners, refrigerators and deep freezers showed a tremendous volumetric growth of 229%, 25% and 42% YoY, respectively. Going forward, introduction of the new “inverter series” in the current year to an over-whelming market response is anticipated to swell revenue by 36% in the appliances division. Furthermore, forecasted sales in appliances division is set to increase at a 3-year CAGR of 33%.
Power: Slow and Steady
On the contrary, power division of the company observed sluggish performance as revenue took a beating to PKR 5.0bn in 1HCY17 vis-à-vis PKR 6.77bn in 1HCY16 (-26%), due to deferred contracts of power transformers by the government. Although revenues of power may slow down by 22% YoY in CY17, we project recovery in 2H given the governments increased focus on power generation amid election year. While going forward, we believe the division is set to improve in 2HCY17 as sustenance stems from confirmed order intakes of switch gears equipment recently prequalified by K-electric.
Outlook & Recommendation
We riterate our stance on gross margins to remain stable at 30% given robust demand in the subsequent years along with the company benefitting from large scal economies. We further expect sales to remain robust with sturdy volumetric statistics conjectured in upcoming years. We also accentuate the company’s future plans to rebrand its appliances division by means of new products to tap the growing market dynamics and needs. PAEL is also poised well for the forthcoming progress in the power sector including IPP’s, expected privatization of DISCOS and massive demand of housing schemes.