Elixir Securities Limited – Elixir Insight

Karachi, May 10, 2017 (PPI-OT): Tariq Glass Industries Limited – Expansion into Opal Glass May Open Up Vals!

TGL recently announced its 9MFY17 financial result where the company posted PAT of PKR605mn (EPS of PKR8.23), up 44% YoY while 3Q earnings clocked in at PKR2.90/sh, up 16% YoY.

Along with the results, the company highlighted its plan of expanding its float glass capacity for which feasibility study is currently underway.

While the company has yet not finalized its decision on float glass expansion, we believe, it may create oversupply in the sector given GHGL, one of the other leading players in the category, has already decided to expand its production by 450tpd

The company also reiterated its plan of launching a new project namely Opal Glass Dinnerware which would entail establishing a new production line for manufacturing 300,000 dinner sets (72 pieces each) annually.

Our back of the envelope working suggests annualized earnings contribution from the new segment to be around PKR1.77/sh (see table below).

While market valuations have fairly priced in current operations of the company, we believe upside potential may emanate from entry into Opal Glass Dinnerware segment. We for now maintain our Dec. ’17 PT of PKR125/sh and await expansion details.

Absence of Supply Bottlenecks Led Bottom Line Growth in 3Q:

TGL recently announced its 9MFY17 financial result where the company posted PAT of PKR605mn (EPS of PKR8.23), up 44% YoY while 3Q earnings clocked in at PKR2.90/sh, up 16% YoY. The company recorded robust growth in top line during the quarter of 28% YoY which is attributable to absence of supply bottlenecks leading to higher available capacity for its tableware segment.

Recall that one of the company’s tableware furnace was shut down in SPLY for expansion purposes where it was enhancing its capacity by 30tpd to 140tpd. That said, margins of the company contracted by 4pp YoY to ~20% during the quarter which is likely due to lower net retention prices on tableware products
in a bid to boost volumes. It is pertinent to mention that competitive landscape of the tableware segment is quite fierce with TGL’s branded products directly competing with low cost imported Chinese brands.

While gross profit of the company only grew by 7/6% YoY in 3Q/9MFY17, lower fixed costs and finance costs resulted in further bottom line accretion. While selling expenses increased by 43% YoY in 3Q, they went down significantly (41% YoY) on a cumulative basis. Lower selling expenses is likely due to high base effect when the company employed market penetration strategy to make further inroads into the tableware segment. Finance costs on the other hand fell 28/23% YoY in 3Q/9MFY17 on account of deleveraging, reducing leverage by 31pp YoY to 65% in 3QFY17.

Float Glass Expansion on the Cards; May Create Supply Overhang:

Along with the results, the company highlighted its plan of expanding its float glass capacity for which feasibility study is currently underway. Our correspondence with the company’s management indicates that TGL would likely opt for a new float glass line with an estimated capacity of ~400tpd instead of extending capacity of its current float glass line. The company currently hosts a 550tpd float glass line which was installed back in FY13 at an estimated cost of PKR3.5bn, marking company’s first entry into float glass market which was largely dominated by Ghani Glass (GHGL) at the time.

Despite predatory pricing by GHGL to limit TGL’s market share, TGL was able to achieve significant market share in the float glass market aided by its strong product quality. That said, TGL’s ~400tpd and GHGL’s 450tpd (extendable up to 500tpd) expansions in float glass would likely create a supply overhang in the industry notwithstanding robust demand prospects vis- à-vis increased infrastructure activity in the country.

Opal Glass Dinnerware to extend product line in the tableware segment:

The company also reiterated its plan of launching a new project namely Opal Glass Dinnerware which would entail establishing a new production line for manufacturing 300,000 dinner sets (72 pieces each) annually. While economics relating to production costs are still unclear at the moment, our correspondence with the company’s management suggests that total cost of the project would likely be under PKR1.0bn and would be financed with a mix of debt and internal equity.

The management is targeting to achieve COD by current calendar year end. With regards to the industry dynamics, our market survey suggests that prices of opal glass dinnerware ranges between ~PKR5000-8000/set while the market segment is dominated by Chinese imports.

Though TGL has been able to ward off competition from low quality and low cost imported tableware articles, we believe penetration into a new market would call for significant price discounts to dealers. Our back of the envelope working suggests annualized earnings contribution from the new segment to be around PKR1.77/sh (assuming: 60% utilization, PKR5,000/set selling price, 20% GM and PKR50mn selling expenses). We have also provided earnings under different scenarios (see table below). While project details are still fluid at the time, we await further clarity on the same before incorporating it into our estimates.

Investment case: We slightly tweak our estimates for TGL after incorporating 9MFY17 financial results revising our FY17/18/19 earnings by -13-1% and our Dec-17 PT to PKT125/sh (-0.8%). While market valuations have fairly priced in current operations of the company, we believe upside potential may emanate from entry into Opal Glass Dinnerware segment. With regards to float glass expansion, we remain wary owing to tangible risks of oversupply in the sector given GHGL has also decided to expand its float glass capacity.

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Elixir Securities Limited – Elixir Insight

Karachi, May 10, 2017 (PPI-OT): Tariq Glass Industries Limited – Expansion into Opal Glass May Open Up Vals!

TGL recently announced its 9MFY17 financial result where the company posted PAT of PKR605mn (EPS of PKR8.23), up 44% YoY while 3Q earnings clocked in at PKR2.90/sh, up 16% YoY.

Along with the results, the company highlighted its plan of expanding its float glass capacity for which feasibility study is currently underway.

While the company has yet not finalized its decision on float glass expansion, we believe, it may create oversupply in the sector given GHGL, one of the other leading players in the category, has already decided to expand its production by 450tpd

The company also reiterated its plan of launching a new project namely Opal Glass Dinnerware which would entail establishing a new production line for manufacturing 300,000 dinner sets (72 pieces each) annually.

Our back of the envelope working suggests annualized earnings contribution from the new segment to be around PKR1.77/sh (see table below).

While market valuations have fairly priced in current operations of the company, we believe upside potential may emanate from entry into Opal Glass Dinnerware segment. We for now maintain our Dec. ’17 PT of PKR125/sh and await expansion details.

Absence of Supply Bottlenecks Led Bottom Line Growth in 3Q:

TGL recently announced its 9MFY17 financial result where the company posted PAT of PKR605mn (EPS of PKR8.23), up 44% YoY while 3Q earnings clocked in at PKR2.90/sh, up 16% YoY. The company recorded robust growth in top line during the quarter of 28% YoY which is attributable to absence of supply bottlenecks leading to higher available capacity for its tableware segment.

Recall that one of the company’s tableware furnace was shut down in SPLY for expansion purposes where it was enhancing its capacity by 30tpd to 140tpd. That said, margins of the company contracted by 4pp YoY to ~20% during the quarter which is likely due to lower net retention prices on tableware products
in a bid to boost volumes. It is pertinent to mention that competitive landscape of the tableware segment is quite fierce with TGL’s branded products directly competing with low cost imported Chinese brands.

While gross profit of the company only grew by 7/6% YoY in 3Q/9MFY17, lower fixed costs and finance costs resulted in further bottom line accretion. While selling expenses increased by 43% YoY in 3Q, they went down significantly (41% YoY) on a cumulative basis. Lower selling expenses is likely due to high base effect when the company employed market penetration strategy to make further inroads into the tableware segment. Finance costs on the other hand fell 28/23% YoY in 3Q/9MFY17 on account of deleveraging, reducing leverage by 31pp YoY to 65% in 3QFY17.

Float Glass Expansion on the Cards; May Create Supply Overhang:

Along with the results, the company highlighted its plan of expanding its float glass capacity for which feasibility study is currently underway. Our correspondence with the company’s management indicates that TGL would likely opt for a new float glass line with an estimated capacity of ~400tpd instead of extending capacity of its current float glass line. The company currently hosts a 550tpd float glass line which was installed back in FY13 at an estimated cost of PKR3.5bn, marking company’s first entry into float glass market which was largely dominated by Ghani Glass (GHGL) at the time.

Despite predatory pricing by GHGL to limit TGL’s market share, TGL was able to achieve significant market share in the float glass market aided by its strong product quality. That said, TGL’s ~400tpd and GHGL’s 450tpd (extendable up to 500tpd) expansions in float glass would likely create a supply overhang in the industry notwithstanding robust demand prospects vis- à-vis increased infrastructure activity in the country.

Opal Glass Dinnerware to extend product line in the tableware segment:

The company also reiterated its plan of launching a new project namely Opal Glass Dinnerware which would entail establishing a new production line for manufacturing 300,000 dinner sets (72 pieces each) annually. While economics relating to production costs are still unclear at the moment, our correspondence with the company’s management suggests that total cost of the project would likely be under PKR1.0bn and would be financed with a mix of debt and internal equity.

The management is targeting to achieve COD by current calendar year end. With regards to the industry dynamics, our market survey suggests that prices of opal glass dinnerware ranges between ~PKR5000-8000/set while the market segment is dominated by Chinese imports.

Though TGL has been able to ward off competition from low quality and low cost imported tableware articles, we believe penetration into a new market would call for significant price discounts to dealers. Our back of the envelope working suggests annualized earnings contribution from the new segment to be around PKR1.77/sh (assuming: 60% utilization, PKR5,000/set selling price, 20% GM and PKR50mn selling expenses). We have also provided earnings under different scenarios (see table below). While project details are still fluid at the time, we await further clarity on the same before incorporating it into our estimates.

Investment case: We slightly tweak our estimates for TGL after incorporating 9MFY17 financial results revising our FY17/18/19 earnings by -13-1% and our Dec-17 PT to PKT125/sh (-0.8%). While market valuations have fairly priced in current operations of the company, we believe upside potential may emanate from entry into Opal Glass Dinnerware segment. With regards to float glass expansion, we remain wary owing to tangible risks of oversupply in the sector given GHGL has also decided to expand its float glass capacity.

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