JS Securities Limited – Morning Briefing

Karachi, March 21, 2019 (PPI-OT): PSMC: Loss of Rs0.19/share expected in 4QCY18

We expect PSMC to declare loss after tax of Rs0.19/share in 4QCY18, compared to profit after tax of Rs8.86 in 4QCY17. Along with the result, we expect DPS of Rs3.35 (Rs18.60 last year).

A significant decline in margins due to rupee devaluation and application of 1.25% turnover tax are expected to tilt earnings into negative territory. Moreover, a drop in cash balance will also negatively impact the company’s other income in 4QCY18.

We are currently placing the stock ‘Under Review’ and will update our investment case shortly. We point out here that despite recent positives (removal of non-filer ban and higher restrictions on used CBU imports), the overall sector outlook remains bleak due to upcoming challenges.

Loss of Rs0.19 expected in 4QCY18

We preview Pak Suzuki’s (PSMC) earnings ahead of the company’s board meeting scheduled for the coming Monday (March 25). We forecast that the company to declare loss after tax of Rs16mn (LPS: Rs0.19) in 4QCY18, compared to a profit after tax of Rs729mn (EPS: 8.86) in 4QCY17 and Rs95mn (EPS: Rs1.15) in 3QCY18. Along with the result, we expect the company could announce DPS of Rs3.35 (CY17 DPS: Rs18.60). Our expectations of a loss in 4QCY18 – the first quarterly loss since 4QCY12 – is based on two reasons. Firstly, margins are expected to drop by 162bps YoY due to ~21% YoY rupee devaluation against the dollar. Although net sales are projected to grow by 5% YoY, this is primarily due to price increases in lieu of weakening rupee, whereas volumes declined by 8% YoY.

At the same time, price increases were in the range of ~8%-15% during this period across all models, which was lower than the decline in the local currency, leading to an expected decline in margins (note that 3QCY18 margins shrank by 353bps YoY). Other than an expected decline in margins, the impact of turnover tax is also expected to significantly impact profitability in the quarter (as the applicable tax will be higher of corporate tax or 1.25% turnover tax), which will push the company into negative territory in our view. Another factor that could hurt the company’s earnings in 4QCY18 is an expected 88% YoY drop in Other Income, given the reduction of Cash on the company’s balance sheet at the end of 3QCY18 (Rs892mn vs. Rs11.3bn at end of 3QCY17).

Upcoming challenges easily outweigh recent positives

We are currently placing the stock ‘Under Review’ and will update our investment case shortly. We point out here that despite recent positives (removal of non-filer ban and higher restrictions on used CBU imports) the overall sector outlook remains bleak due to upcoming challenges. For instance, the company’s limited pricing power (due to a price-sensitive customer base) is expected to be weakened further in our view with the influx of new entrants, whereas any further devaluation of the local currency will compound the company’s current predicament.

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