Khadim Ali Shah Bukhari Securities Limited (KASB) a leading brokerage house in Pakistan has published four investment ideas for the week ending Jun 04’21. Stock covered in the research note includes Arif Habib Limited (AHL PA Equity), EMCO Industries Limited (EMCO PA Equity), The Organic Meat Company Limited (TOMCL PA Equity) and Loads Limited (LOADS PA Equity).
In last week investment ideas published by KASB research includes Flying Cement (FLYNG PA Equity), Engro Corporation (ENGRO PA Equity), Fauji Fertilizer Bin Qasim Limited (FFBL PA equity) and Sazgar Engineering Works Limited (SAZEW PA equity). FLYNG cement remained top performer and gives 21.9% to investors who followed KASB research, FFBL gives 1.3% return adn ENGRO gives 0.9% return, While SAZEW gives negative 0.9% return to the investors.
Research Idea # 1: Arif Habib Limited (AHL PA Equity); +93% upside
Key Catalyst: PSX made a 4-year high last week, with peak activity on May 26th and May 27th and this was preceded by heavy trading activity. This warrants attention to the listed brokerage space. AHL offers the best exposure to capital markets with leading IPO transactions and brokerage market share when compared with NEXT, EFGH and JSGCL.
Why to Buy? Despite a COVID induced 10-day Eid holiday season in May’21, PSX had an eventful month, witnessing MSCI rebalancing, peak remittances, SBP’s status quo, WTL acquisition euphoria, among other key things. AHL is a key player whose profitability has already rebounded by a mile while the scrip has returned only 13% in May’21. We believe, in a growth momentum over next year, as guided by SBP over the latest MPS announcement, PSX is likely to witness new highs as we tread along FY22.
Robust activity at the bourse: PSX has already witnessed 43% YoY jump in value traded in KSEAll for 4QFY21 – two months versus three in 4QFY20 – that too with a 10-day holiday to spare. The quarter will likely end on a better note as a growth target of 4-5% for next year will likely engender a progressive budget for FY22, instead of a populist one. The Average Daily Traded Value (ADTV) is up 153% in FY21TD to USD 116mn as compared to 45.83mn in FY20 and it is slated to improve further as cyclicals perform and depressed valuations in other mainboard scrips witness mean reversion.
The short-term investment portfolio of AHL has recorded massive realized and unrealized gains of PKR 1,296mn during 9MFY21 against a loss of PKR 120mn last year.
Investment banking revenue growth is largely discounted: We believe the market is not pricing AHL’s targeted corporated finance activity during the year which has also added robustly; Agha Steel IPO, Panther Tyre IPO, EPCL’s Preference Shares, Bank Alfalah’s TFC, to name a few. The IB revenue is already up 325% to PKR 473mn during 9MFY21.
The scrip is currently trading at FY21/FY22E PE of 2.2/4.6x, respectively and KASB has assigned a 7.0x PE to the average forecast for FY21/22/23 excluding capital gains to reach a PT of PKR 139.90 per share, which also includes equity portfolio value of PKR 36.4/share.
Research Idea # 2: EMCO Industries Limited (EMCO PA Equity); +88% upside
Key Catalyst: With focus on enhancing the country’s electricity distribution network, the demand for EMCO’s porcelain insulators is projected to grow considerably.
EMCO’s sales to jump substantially as network up-gradation takes precedence: Pakistan’s power sector has been undergoing a fundamental shift over the past few years. In order to achieve the planned 2.5pps reduction in T&D losses, the electricity network’s up-gradation is in order. Moreover, with the addition of newer CPEC-based electricity generation projects, the need for expanding the existing network is expected to materialize. The anticipated increase in electricity infrastructure spending is likely to catalyze high demand for porcelain-based insulators.
EMCO’s expansion the way forward: The existing demand for porcelain insulators has pushed the company’s utilization levels to 97% during FY21. Once the electricity network up-gradation picks pace as newer electricity projects come online, EMCO will be compelled to expand its production capacity to keep up with the demand. We foresee the company expanding its capacity by at least 50% to ensure sustainable production levels once the CPEC phases commence and newer electricity projects come online.
Exposure to the energy chain’s cash crunch likely to appease: EMCO’s key market involves the energy chain stakeholders, particularly DISCOs. The prevalent cash crunch of the energy chain has ballooned EMCO’s trade receivables to PKR 524mn (DSO: 94 days). Consequently, the company has to rely on short-term borrowings (PKR 620mn) to fund its working capital. The improving dynamics of the energy chain, however, are likely to alleviate the situation and enable the reduction of its leverage.
Research Idea # 3: The Organic Meat Company Limited (TOMCL PA Equity); +45% upside
Key Catalyst: TOMCL’s diverse product range, growing market reach and natural hedge against USD makes it an attractive investment case
Why to Buy? The company posted a top-line growth of 9% YoY in 9MFY21 driven by wider product range exported to Middle Eastern countries. Growing halal market has helped the company in expanding its reach to the U.S. and as well as Chinese markets. We expect this momentum to continue as the company continues to expand by installing refrigeration equipment that would achieve CoD in 1QFY22.
Geographic diversification to shield from localized economic downturn: TOMCL has the most diverse product portfolio compared to other meat companies operating in Pakistan. It has the largest footprint in exporting Halal meat and enjoys the largest market access within the meat export sector in Pakistan. Its specialty includes exports of Offal which gives it a unique edge over other competitors. UAE is the largest market of the company that constitutes 72% of sales. TOMC has been able to counter geographic concentration risk by securing approvals and registration by Chinese customs authorities to export heat treated beef. To highlight, China is the world’s largest meat importer, therefore allowance of meat export by TOMCL is a major trigger for company’s earnings. The company also exported its first shipment to the U.S. that included Offal for use in pet foods.
PKR depreciation provides a natural hedge: TOMCL, currently operating at 50% capacity utilization, derives major portion of its revenue through exports having a contribution of 94%. Animal procurement is the major cost of the company (accounting for ~92% of the total COGS) which is sourced from domestic suppliers. To secure smooth supply of animals, the company plans to add 2,000 – 2,500 new sheds. Since the costs are in PKR, currency exposure provides a tailwind to the company from PKR depreciation that ensure stable gross margins over our investment horizon.
Research Idea # 4: Loads Limited (LOADS PA Equity); +126% upside
Key Catalyst: Automobile sector has witnessed sales recover at an unprecedented pace. Vehicle sales are up by 54% YoY already. The results on the bottom-line are visible with further improvement expected. That said, automobile parts manufacturers tend to get direct benefit of increased volumes. The company is engaged in the manufacturing of several products including Exhaust System, Radiators, and Sheet Metal Components. Upcoming venture into alloy wheels for OEMs should provide a kicker to earnings once commissioned.
Cost plus business model is a premium factor: Automotive business is volatile in terms of profitability owing to surges in cost components. Catering to this industry, LOADS operates at a cost plus model across its product line up. We see this in conjunction with the volumetric upside at play for automobiles. This particularly garners premium in the automotive segment allaying concerns on profitability outlook. This is already evident with 9MFY21 margins at 12% and PBT up by 4.7x YoY. The company has realized margins at 13% in its latest quarter 3QFY21 and volumetric improvement leading revenues up by 54% YoY. As a result we eye the company to garner premium valuation for its profitability given its business model.
Hi-Tech Alloy Wheel to expand product and profitability horizon: Loads had acquired an alloy wheel plant from Toyota Australia to set up alloy wheel facility in Pakistan. The venture can capture the entire OEM market potentially. That said, the plant is currently on hold owing to Covid-19 outbreak with 70% of its installation completed so far. The company has hinted at resumption of plant installation in the upcoming quarter. Our calculations suggest, the plant can deliver annualized earnings of PKR4/sh.