JS Securities Limited – Morning Briefing

Karachi, December 18, 2017 (PPI-OT): PSMC: Earnings and TP revised down, ‘Buy’ maintained with upside of 31%

We update our investment case on Pak Suzuki Motor Company (PSMC) following 9M2017 results, where we revise down our earnings forecasts for 2017E-2020F by 15-27%.

Downwards revision in earnings’ estimates is owing to (1) expected Pak Rupee depreciation against US$, (2) rising steel prices, and (3) increase in oil prices.

Our Dec-2018 Target Price is lowered to Rs620 (previously Rs793), however presenting an upside of 31% due to steep market correction. The stock currently trades at 2018F P/E of 8.4x, with a D/Y of 5%.

We now expect earnings to grow by a CAGR of 17% during 2016A-2020F, mainly on the back of growing demand for automobiles, with PSMC’s 1,000cc segment (comprising Wagon-R and Cultus) to exhibit rapid growth.

We flag that our earnings’ forecasts factor in declining margins, due to aforementioned deteriorating macros.

We anticipate marginal impact on earnings from addition of new models, namely Cultus AGS (automated transmission) and Mega Carry (CBU pickup), due to high prices relative to competition.

TP revised down to Rs620, maintain ‘Buy’

We revisit our investment case on Pak Suzuki Motor Company (PSMC), where we incorporate 9M2017 results and update our macro assumptions. Our earnings estimates for 2017E-2020F are revised downwards by 15-27%, mainly on the back of (1) impact of Pak Rupee depreciation against US$, (2) higher steel prices (HRC prices up 35% during YTD 2017), and (3) impact of higher oil prices on raw material costs (plastic components in particular) and distribution costs. Resultantly, our Dec-2018 Target Price for the company revises down to Rs620 (previously Rs793).

Despite the steep revision in our Target Price, we maintain our ‘Buy’ rating on the stock, as the stock price has come down sharply by 23% during YTD 2017 (40% during YTD FY18), which we believe is unjustified, given rising auto demand, coupled with recent developments, such as RD imposition on imported CBUs. Our Target Price offers an upside of 31% from last closing market price. The stock currently trades at 2018E P/E of 8.4x, offering D/Y of 5%. We also revise our payout assumptions upwards from historic average of 20% to 40% to meet the minimum payout requirements, resulting in higher potential dividend payouts going forward. Key risks to our estimates include (1) higher than expected Pak Rupee depreciation against US$, (2) higher than expected commodity prices, and (3) earlier-than-expected introduction of competition.

Earnings to grow by a CAGR of 17% during 2016A-2020F

Despite the downward earnings’ revision from previous estimates, we forecast PSMC’s earnings to grow at a 4-Year CAGR of 17% during 2016A-2020F. Our earnings’ growth assumptions rely heavily on 8% CAGR in volumes during the same period, which we believe is realistic, given the strong demand for the company’s 1,000cc Wagon-R (online taxi apps led demand to persist) and Cultus variants, followed by demand for other variants to grow (Mehran, Wagon-R and Bolan). Secondly, we believe the recent imposition of RD on CBU imports will also divert customers towards locally produced models.

While the decision to impose RD stands challenged in court by importers, our channel checks suggest that the duties and restrictions on imported CBUs continue to be implemented as the government faces pressure from a continuously deteriorating external account scenario. We also flag that our earnings’ forecasts factor in declining margins going forward on the back of (1) depreciating Pak Rupee, (2) rising commodity prices, and (3) competitive threats from new entrants (PSMC has the least pricing power in our view among existing OEMs due to its target market’s characteristics).

New models to have marginal impact on earnings

The company recently inducted four new models into its lineup, including the Cultus AGS (automated transmission), Mega Carry (CBU pickup) and two new bike variants. While the automated Cultus variant offers customers an additional option, particularly in wake of RD imposition on CBU’s, we expect limited long-term impact (other than a possible initial euphoria associated with a new model) due to its high price of over Rs1.5mn, making it pricier than the 1,300cc Swift and within close distance of Honda City 1.3L. Similarly, the Mega Carry pickup is priced at Rs1.5mn, more than double of its existing Ravi pickup. Although the Mega Carry offers better load capacity and caters to a different market (Shehzore customers in particular), we do not anticipate a major impact on earnings from the inclusion of Mega Carry into its lineup.

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