Morning Call about – Earnings to clock in at PKR 15.38/share in CY12-Arif Habib Limited

Karachi, March 20, 2013 (PPI-OT): The board of directors of Pak Suzuki Motor Company Limited (PSMC) is scheduled to meet on March 21, 2013 to announce the financial result for the year ended December 31, 2012.

According to Arif Habib Limited expects the company to earn profit after tax (PAT) of PKR 1,265mn (EPS: PKR 15.38), which represents a substantial 59% jump over CY11’s PAT of PKR 794mn (EPS: PKR 10.55). The improvement in company’s bottom-line is expected on account of (volumetric) sales growth, along with multiple price hikes exercised by the company during the year and, nevertheless to mention, the support in the sale volume from the Punjab Gov’t taxi scheme. Furthermore, Arif Habib Limited expects PSMC to announce a final cash dividend of PKR 4/share.

Financial Highlights      
PKR mn4QCY12E3QCY12AQoQCY12ECY11AYoY
Net sales

10,473

11,428

-8%

58,373

52,719

11%

Gross profit

270

(49)

n.m

2,473

1,869

32%

Gross margins

2.6%

-0.4%

n.m

4.2%

3.5%

70bps

Sales and admin expenses

259

315

-18%

1,150

1,000

15%

Other income

188

95

99%

569

620

-8%

Finance cost

5

2

132%

13

18

-26%

Profit after tax

89

(253)

n.m

1,265

794

59%

EPS (PKR)

1.09

(2.35)

15.38

9.65

Dividend

4.00

0.00

4.00

2.00

Source: Company Accounts and Arif Habib Research

Strong margins and volumetric growth to expand gross profit by 32% YoY PSMC’s gross profit is expected to rise by 32% YoY to PKR 2.5bn during CY12. This is expected to be achieved mainly due to support of a 32% YoY growth in sales volumes to 115k units, which, when coupled with an average 9% price hike on all its models, is expected to result in a top line expansion of 11% to PKR 58bn.

Prices were increased by the company in CY12, especially in 2HCY12, in order to offset the increased cost burden of Euro II compliance and PKR depreciation against JPY. Company’s gross margin is expected to stand at 4.2% in CY12 against 3.5% in CY11, mainly on account of soft steel prices (-5% YoY) and low fixed cost per unit during 1HCY12 with increase in volume.

Bleak outlook with many question marks

The outlook of the company in CY13 is expected to remain dull. Arif Habib Limited assumptions is based on: 1) gov’t behest of banning CNG-fitted vehicle, 2) a one-time gain from the Punjab gov’t taxi scheme, 3) discontinuation of ever-running model ‘Alto’ with no replacement of the same, and 4) influx of imported vehicles.

Currently Competition Commission of Pakistan (CCP) in its meeting with all the stakeholders of the Auto industry stated that the reduction in the age limit from five to three years is not justified and, hence, is a violation of the consumer rights. However clarity would come with the arrival of the interim gov’t and its stance on this policy. Trade liberalization with India could eventually bring fruits for the company as post liberalization of trade, the revival of ‘Alto’ is expected by importing parts from India.

Recommendation

Arif Habib Limited DCF based Jun-13 target price for PSMC works out to PKR 104.55/share, which offers a meager upside potential of 2% from last closing price of PKR 103/share. Arif Habib Limited thus recommend a ‘Hold’ stance on the scrip. The stock is currently trading at CY13F PE and dividend yield of 7.9x and 2%, respectively.

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