By: Topline Securities Private Limited
Investment thesis: Pak Elektron Limited provides best exposure to Pakistan’s appliances and power sectors. We show our liking for PAEL as the recent fall of 19% in share price of PAEL from its peak seen on Aug 17, 2015 provides an excellent opportunity to accumulate. Lately we also met senior management team of PAEL and we remain confident that fundamentals of appliances and power segments are intact.
We estimate earnings of PAEL to grow by 50%/26% in 2015E/2016F on the back of strong volumetric growth of refrigerators and reforms in power sectors. The stock is currently trading 2015E/2016F PE of 8.9x/7.1x, provides 47% upside potential from current levels.
Sales to grow at a 3-year CAGR of 14% and profits 27%. We estimate that net sales of the company will grow at a 3-year (2015-2017) CAGR of 14% to Rs34.9bn. Currently, sales mix between appliances and power division is 48% and 52% respectively. However, we estimate that this will change to 42% and 58% going forward considering power sector reforms initiative by the govt., expected introduction of automatic energy metric system and growing EPC segment of power division.
Earnings of the company are expected to increase at a 3-year CAGR of 27% to Rs5.4bn (EPS Rs13.6) in 2017. Refrigerator will remain the main contributor towards earnings of the appliances division since it has highest margin of around 37-40%. Just to highlight, appliances division sales are 60% from rural areas and 40% from urban. Sales in rural areas are dependent upon agriculture income.
Appliances Division: The appliances division specializes in manufacturing of home appliances which includes air conditioners, refrigerators, and deep freezers. This division contributed 48% to total gross revenues in 1H2015. It is important to note that company historically records highest sales in June quarter owing to strong volumetric demand of refrigerators in summer. PAEL has 26% market share in refrigerator, contributing ~90% to appliances division revenues.