JS Securities Limited – Morning Briefing

Karachi, December 14, 2017 (PPI-OT): HTL: Valuations updated post management discussion

In-line with our fresh discussions with the management of Hi-Tech Lubricants (HTL) Limited, we update our valuations for the company.

We revise our near term consolidated EPS estimates upwards by 1% for FY18E-FY19F. However, being prudent, we revise our long-term estimates downward by 4-20% owing to changes in our pricing assumptions. Our Dec-18 Target Price is revised down to Rs116 (from Rs133 previously).

In spite of Target Price downgrade, we maintain our ‘Buy’ stance on HTL, offering a massive upside of 63% from present levels as HTL has underperformed massively against the benchmark KSE-100 index; down ~39% during YTD FY18 vis-a-vis KSE-100 index).

We now eye company’s volumes (both imported and own blending) to increase by a 6-year (FY17A-FY23F) CAGR of 15.2%. With blending plant now operating in full swing and cost savings to the tune of Rs19-40/litre, prices have been adjusted to capture greater market share.

The company is likely to start operating as an OMC from 3QFY18 and management discussion suggests that it plans to install 80 fuel stations in the first year and 120 in the second year of operation with total target of 360 stations in the first 5 years of operations.

Although we refrain from incorporating company’s OMC business into our valuations for the time being, our back of the envelope calculations suggest that OMC business may be able to achieve 3.2% market share by the end of FY23F.

Like other OMCs, HTL’s plans to build fuel pumps will help HTL boost its mainstream lubricant sales as well and help it expand its outreach in areas outside Punjab.

Strong ‘Buy’ despite forecasts adjustments

In-line with our fresh discussions with the management of Hi-Tech Lubricants (HTL) Limited, we update our valuations for the company. We revise our near term consolidated EPS estimates upwards by 1% for FY18E-FY19F. However, being prudent, we revise our long-term estimates downward by 4-20% owing to changes in our pricing assumptions. Our Dec-18 Target Price is revised down to Rs116 (from Rs133 previously). Note that our estimates do not incorporate company’s venture into the mainstream OMC business (white oil products sale).

In spite of Target Price downgrade, we maintain our “Buy” stance on HTL, offering a massive upside of 63% from present levels as HTL has underperformed massively against the benchmark KSE-100 index; down ~39% during YTD FY18 vis-à-vis KSE-100 index). The stock is trading at attractive FY18E/19F P/E of 8.4x/6.7x respectively. Key risks to our valuations include (1) sharp increase in international oil prices and imported lube base oil, (2) steep depreciation of Pak Rupee vis-a-vis the greenback (5% depreciation of PKR affects profits by ~1.9%) and (3) less than expected volumetric growth.

Blending plant top to provide next leg of growth

Our changes in our forecasts are motivated by fresh discussions with the management whereby we now eye stronger volumetric growth in the near term but reduce growth forecasts in later periods. We now eye company’s volumes (both imported and own blending) to increase by a 6-year (FY17A-FY23F) CAGR of 15.2%. Of these growth numbers, own blending portion is likely to grow by 15.9% and imported lubes sales to grow by 14.0%. Combined with average price increases of 2.8-3.0% during the projection period, overall revenues are expected to post strong 6-year CAGR of 18.3%.

HTL’s revenues have increased by historical 7-year (FY10A-FY17A) CAGR of 18.4% mainly on the back of 8.1% CAGR in volumes during FY10-FY16 period (own blending started in FY17) and 4.9% average growth in prices during FY10-FY17 period. It is worth highlighting that most of the growth captured until now was mainly through building of strong brand image and imports. With blending plant now operating in full swing and cost savings to the tune of Rs19-40/litre, prices have been adjusted to capture greater market share.

Mainstream OMC business to be cherry on the cake

The company is likely to start operating as an OMC from 3QFY18 and management discussion suggests that it plans to install 80 fuel stations in the first year and 120 in the second year of operation with total target of 360 stations in the first 5 years of operations. Construction of storages (1,000MTs HSD and 2,200MTs MS) is in final stages and awaits OGRA’s inspection (planned this month). After regulatory approval, license to operate as an OMC will be granted. HTL plans to take its overall storage capacity to 25,735MTs in the next 7 years. This will be achieved by incurring CAPEX of Rs3.8bn of which Rs3bn will go into construction of storage facilities and the rest will be incurred to develop pump infrastructure.

The company plans to finance this CAPEX through D/E structure of 50:50. After completion of ongoing storage, the next storage of 5,000MTs is planned to be constructed either in Machike, Mehmoodkot, Shikarpur or Peshawar. Construction of storage at Port Qasim (possibly through a JV) is also being considered. We refrain from incorporating company’s OMC business into our valuations for the time being, however our back of the envelope calculations suggest that OMC business may be able to achieve 3.2% market share by the end of FY23F (as compared to company’s target of 3.0%). We use Hascol Petroleum’s (HASCOL) current sales per outlet as proxy and our industry demand forecasts for both MS and HSD.

Operating on both franchise and BOO model

Apart from using fuel pumps as sales destination, the company is also continuing to build Express Centers with 11 centers on Build, Own and Operate (BOO) basis. Apart from BOO, 80 franchises are also planned during 2018 to bolster sales. For BOO centers company plans to incur CAPEX of Rs200mn during the next year and make 7 centers operational by Jun-2018. Like other OMCs, building of fuel pumps will help HTL boost its mainstream lubricant sales as well and help it expand its outreach in areas outside Punjab.

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