Khadim Ali Shah Bukhari Securities Limited (KASB) a leading brokerage house in Pakistan has shared five investment ideas for the week ending Jun 11’21. Stock includes Hi-Tech Lubricants (HTL PA Equity), Al – Tahur (PREMA PA Equity),), Abbott Laboratories (ABOT PA Equity), Mughal Steel (MUGHAL PA Equity) and Synthetic Pakistan (SPEL PA Equity).
Sales Idea # 1: Hi-Tech Lubricants (HTL PA Equity)
Economic recovery to boost lubricant sale Local Blending to Keep Lubricants Margins High: HTL is in the process of expanding its blending facilities with the establishment of new LCs for additional blow molding machines, storage tanks and filling lines. The increased focus on local blending and the attached duty & tax benefits are expected to keep the segment’s margins on the higher side. Moreover, its Fighter Brands (in-house produced ZIC Lubricants) saw a 92% volumetric growth in this product line in the 9 months ended 31st March 2021 compared to the same period last year. Overall, the lubricant segment has shown a growth of 61% YoY to PKR 5,788mn during 9MFY21, recording a margin of 23%.
Growth in the Auto Sector: Pakistan’s automobile industry witnessed a significant growth because of new entrants in the market and a rebound in economic activity. Automobile industry has seen sales recover at an extraordinary pace. Vehicle sales are up by 54% YoY already whereas tractor sales are up by 62% YoY. With further economic recovery expected in the coming months HTL’s lubricant as well as OMC business paints a healthy picture.
Profitability to Increase with expansion in OMC Network: The petroleum segment achieved accounting breakeven for the quarter ended 31st March 2021. The marketing and sale of petroleum products through HTL Fuel stations reached PKR 1,465 million translating into the gross profit of PKR 66.4million and loss from operations of Rs36.1 million. The loss is mainly on account of fixed costs, including depreciation, which will be better absorbed with the expansion of this segment’s operations through increase in number of fuel stations. The company presently operated 26 fuel stations and is working to add 3 more to its network. HTL currently has un-utilized IPO proceeds of Rs 516.49 Million to be used for the OMC expansion. Backward Integration Compounded with Product Diversification: The Group has decided to avail new business opportunities in the plastic packaging industry by venturing into the production of plastic products for external customers and third parties. Hi-Tech Blending (Private) Limited (HTBL), a wholly-owned subsidiary of HTL has produced bottles for its own needs since 2016 for both its locally blended and locally filled products. Stock to gain limelight as growth materializes: The stock is down 20% from its peak and I believe it is likely to test newer highs. I think the market is yet to price in the company’s growth prospects in both the Lubricant and OMC’s segment and find present levels a great opportunity to build positions.
Sales Idea # 2: Al – Tahur (PREMA PA Equity)
A rising star: What compelled me to look into the company was the sales growth. Admittedly, the sales growth is coming on the back of low base effect – due to Covid 19 – I feel the growth momentum shall continue. The company has had a sales growth of 41% in 9MFY21 & has already shown PKR 181mn of Net Profit After Tax. The management has also indicated in the Director’s report that their prime focus is on creating operational efficiencies to lever the growth in the dairy segment going forward. Given the fact that there is huge room for improvement in the sales of packaged dairy products, lower milk yields & rising demand for products – company is adequately poised (atleast willing to) capture on the demand cycle,
With easing Covid-19 relaxation, opening up of tea-shops, restaurants & activities at large, there has to be a pent-up demand which is yet to be translated in the numbers of the company. What really excites me is that the management is growth-focused – no wonder why they are securing subsidized Temporary Economic Refinance Facility (TERF) financing by SBP worth PKR 500m. This is fantastic for the shareholders as with low financial costs, the company should hopefully be carrying Net Positive Value projects. Perhaps, these funds would be utilized for expanding their distribution channel into other Urban & sub-urban cities.
Sales Idea # 3: Abbott Laboratories (ABOT PA Equity)
An underappreciated pharma play: While the entire market is fixated with growth stories, ranging from Automobile, Cements, Steel & TPLs/Ghani Group, I feel one ignored growth story is Abbot Laboratories. Giving a perfect mix of Pharmaceutical + Consumer Health, it’s only a matter of time when interest in the stock is garnered once again. In addition, there is good growth expected in Diabetic Care & Diagnostic segment as well. Pakistan has higher propensity of Diabetes in Pakistan, already. I expect the earnings to growth to PKR 55-60 in CY 21 due to strong growth in nutritional segment. Compared to last year, the sales growth already is 21% & I strongly feel this momentum could be carried well into next couple of years as the economic growth, purchasing power & acceptance of the products get more visible. Empirically, Pharma stocks trade at a higher P/E multiple +~20x – which should take the stock to PKR 1,100sh (~+35%) upside from current price. To make the deal better, it’s one of the highest dividend yielding Pharma/Consumer company at 6.5-7%. While it may not sound much, but in an ultra low interest rates scenario, this is a good hedge against inflation.
I believe the sales growth seen in the last two years can very well be repeated in the next 2- 3 years as Balance of Payment crises have marginalized & govt’s focus channels back to the purchasing power. Company’s products – Pedia Sure/Ensure – have commanded a very strong presence & brand in the market as visible on the relentless TV advertisement thereby, affirming product acceptance. This, I believe, is being under appreciated by the market so far. But should end soon & Abbot might dominate the growth theme once again.
Sales Idea # 4: Mughal Steel (MUGHAL PA EQUITY)
Construction, Copper Exports & Shariah Compliance: Mughal Steel (MUGHAL) Construction, Copper Exports & Shariah Compliance While perusing through the “Progress Status of Projects Finance by Right Issue” of Mughal Steel submitted on the PSX website, I got enthused with a few key words that propelled me to put it on my watch list. Of course, a lot of people in the market are vying for constructionrelated proxies (Mughal dominates Long Steel), there are more cherries in the offing. Continuing my preference for the housing sector from last week (when I pitched DGKC), my call for this week is also in the Housing sectors. I would like to quote certain announcements by the company:
The company reported the successful completion of BMR of bar re-rolling project, this enables the company to achieve economies of scale and growth strategy by increasing its rebar production, resultantly its market share in the market Furthermore, the company also declared the utilization of the proceeds of 16% right shares issue (i.e. PKR 2.7 bn), the purpose of the said rights issue was equity financing of its ongoing BMR by retiring various long-term & short-term debts obtained on temporary bridge financing basis. As per the company announcement the proceeds have been fully utilized in retiring its relevant long-term and short-term debts as initially planned. This will result in improved profitability due to decrease in markup cost and decrease in taxation expense due to availability of tax credit (65E) for next 5 years in respect of operations of new bar mill.
The company mentioned in its announcement that the said right issue will improve its capital structure and Shariah compliance of the company. The scrip is going to be a top pick for the Islamic / Shariah Compliant funds, this may generate enough demand to move its price by 20 to 25%. With higher allocation of PSDP to PKR 900b & advancement of low-cost housing scheme, I feel post-budget also excitement around the stock would continue. The demand growth is robust for next few years for sure. The cherry on top in Mughal Steels is Copper Exports. The company attracts merely 1% tax on Copper Ingot Exports, whereas the duty on imports of compressor scrap is 100% exemption if it is done for Exports. This, I believe, would unlock the value of the business & thus, fetch a higher Price to Earnings (P/E) Ratio than the peers, as well as the Index.
The company reported an EPS of PKR 9.97 for nine months ended March, 2021 compared to PKR 1.59 in SPLY, this increase in EPS is purely based upon the increase in topline. The company performed well enough to support my argument.
Sales Idea # 5: Synthetic Pakistan (SPEL PA EQUITY)
Spelling growth: In the out-going week, we saw a lot of interest, activity & positivity in the Auto-Assembles listed on the market. Whether it be higher delivery-times, auto-financing demand, budget expectations & new models’ excitement. However, I thought to look into the sectors benefitting from the end rising demand – the suppliers. My pick of the week is Synthetic Products Enterprise Limited (SPEL).
SPEL’s product suite ranged from plastics, caps, bottles, automatic parts etc. Basically, it rides on the back of its customers’ (FMCG, Beverages etc) growth, who are directly affected by the economic activity in the economic. Plus, the sponsor’s vision – and history – is full of product diversification & expansion. Hence, this is being mispriced/under appreciated by the market.
Plenty of prestigious customers, such as, Nestle, Unilever, Coca Cola, Pespi, Qarshi, Gourmet, Pizza Hut, Honda, Suzuki, Toyota & Engro foods are its clients. Essentially, what management has remarkable done is develop “reliability”. That’s a key asset in the business, in my opinion. One that should fetch higher premium than other risky ventures.
Therefore, as the bottom-up growth in the economy kicks-in, invariably the demand for SPEL’s products is interlinked with their sales. Hence, I expect the company to come back into the growth mode – similar to Economy’s life cycle – start posting higher sales, efficiencies & earnings growth.
It is also expected that the new factory in Karachi would also augment the sales of the company. As per market expectations & management, the new factory should eventually add PKR 1b to the topline & my back of the envelope EPS is within the range of PKR 6-6.5 for the next year. While it may be too farfetched but they are also planning to venture into the value chain of mobile assembling – which I am not incorporating at the moment. Hence, I believe this stock should trade north of PKR 50/share.
