By: Sherman Securities (Pvt.) Limited
Pak Elektron Limited (PAEL) is one of the few stocks which remained in limelight during last couple of weeks. Besides robust earnings growth expected in 2015, two developments that led to the excitement in shares were 1) MOU with HUAWEI to undertake building of advanced metering system in Pakistan and 2) debt to equity swap with National Bank of Pakistan (NBP). We believe the new meter system will significantly improve PAEL’s earnings, while the later may slightly dilute earnings.
We raise PAEL’s EPS by 3-5% during 2015-17 (due to upward revision in our sales assumption) and target price by 19% to Rs101 (on account of higher cut in discount rate). The stock has rallied by 33% ever since we initiated our research coverage on PAEL with ‘BUY’ recommendation dated May 22, 2015. We maintain our stance as the company is trading at 2015 & 2016 PE of 8.4x and 7.1x, respectively.
Govt. finally serious on introducing automatic meters: Recently, PAEL announced that it has signed a Memorandum of Understanding (MOU) with HUAWEI Technologies Pakistan Limited to jointly undertake building of advanced metering infrastructure (AMI) in Pakistan. Since last two years the government held discussions with Asian Development Bank (ADB) over the implementation of AMI in the power sector. The project aims to reduce distribution losses and improve revenue collection by replacing old meters with automated meters which will modernize the electricity metering and billing system.
As per the latest Public Sector Development Project (PSDP) and ADB documents, the first phase of the project will cost around Rs60bn. This will cover approx. 6.0mn consumers in Islamabad Electric Supply Company’s (IESCO) and Lahore Electric Supply Company’s (LESCO) network. Interestingly, first time in Budget FY16, the govt. has allocated a small portion of Rs1.6bn for this project. Our discussion with relevant sources suggests that the first phase of project may take at least 3-4 years. Once phase 1 is completed, the same will be implemented throughout Pakistan. Assuming that PAEL is awarded with the tender of deploying smart meters as per its market share of 25% for phase 1, it may improve EPS by Rs3-4 over next 3-4 years, we believe. Just to recall, PAEL’s gross revenue from energy meters was around Rs1.5bn in 2014 which may increase by Rs15bn in next 4 years.