KASB research has picked Fauji Fertilizer Bin Qasim Limited (FFBL PA Equity) and Sazgar Engineering Works Limited (SAZEW PA Equity) as investment ideas for the weak while KASB sales team has picked Nishat Power Limited (NPL) as their investment idea.
Fauji Fertilizer Bin Qasim Limited (FFBL PA Equity); 30% upside
Key Catalyst: Cash inflow from sale of Wind energy projects, agriculture reform package and higher DAP prices keep the earnings elevated.
Why to Buy? In its recent notice on PSX, the company disclosed to sell its stake of 35% each in Foundation Wind Energy I and II, subject to the approval of shareholders. This would result in cash inflow of PKR 5.5bn and ease off company’s debt obligations that stand at PKR 27.0bn as of 1QCY21. This would further improve the D/E ratio that clocked in at 1.8x in the latest accounts opening up dividend paying capacity for the company. To highlight, the transaction would result in a one-time P&L gain of PKR 2.3/sh.
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Agriculture package to keep fertilizer demand robust: Additionally, the company is expected to benefit from the agriculture package announced by the government in Budget FY22. Under the reform package, PKR 12bn has been earmarked for food security and enhancement of major crop’s yields. This would keep the demand for DAP elevated that would bode well for the company as it has a market share of 35%.
DAP prices have remained on a higher side: KASB research expects FFBL’s core profitability to remain in positive territory because of elevated local DAP prices and spot primary DAP margin stand at USD180/MT. KASB research expects FFBL to post an EPS of PkR 5.6 in CY21 because of higher DAP margins in comparison to a profit of PkR 2.2/sh in CY20.
Investment case: Lower finance cost because of reduction in debt obligations and higher DAP prices validates our case for FFBL. We have an Outperform rating on the stock and our target price stands at PkR 35/sh (based on long term primary DAP margin of USD150/MT), providing an upside of 35% from the last close of PkR 26/sh. We expect FFBL to announce dividend of PKR 1.0/sh in CY21 after skipping it for the past 2yrs.
Key risks: Major risks that KASB research has published to their investment case include i) decrease in international DAP prices, ii) hike in gas rate and iii) increase in interest rates.
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Sazgar Engineering Works Limited (SAZEW PA equity); +51% upside
Key Catalyst: SAZEW gets Haval as Greenfield investment under AIDP. KASB research expects expansion in volumes and margins from Haval CKD line up.
Why buy it? Multi positives are in the offing for SAZEW. Haval has captured strong attention in the compact SUV segment so far. Haval offers exceptional value with its Jolion and H6. We expect the company can easily push out 1200 units in the next twelve months. Once Haval CKD rolls out, we see the company to enjoy margin galore. On the other hand the company is in late stages of plant completion and commissioning of four wheel vehicle assembly. It is expected to feature BIAC line up launching four vehicles this year.
Haval to turn heads and earnings: Haval is the automotive badge for vehicles produced by Great Wall Motors. SAZEW has announced on July 02, 2021 on its success in attaining Category A Greenfield for Haval line-up. We see it a big positive for margins and volumes. This can ensure availability of Haval and CKD roll out should attract concessionary duties for 5 years. To recall, Haval is placed as an exceptional value for money vehicle. Sazgar has announced prices of Jolion and H6 in the compact SUV segment. The buying frenzy in the compact SUV segment is unlikely to dissipate with the new found category. As a result we expect the company to achieve sales of 1,200 vehicles (up from 900 vehicles previously) in the next twelve months. This is expected to bring in earnings of PKR 15/sh in addition to its three wheeler and rim business.
Twice the bang: Sazgar has entered the four wheel vehicle segment in a two pronged strategy. It has partnered with BAIC, one of the largest automotive company in China for assembly of vehicles under AIDP 2016. It is expected to roll out four vehicles under the BAIC badge. It is expected to roll out a hatchback and a sedan version of BAIC D20. Further, it plans to launch a crossover X25 and an off-roader BJ40-Plus. We expect the company to take advantage of the new EV policy to roll out an EV vehicle as well. Our back of the envelop calculations suggest this to bring in earnings of PKR 9/sh in its first year of operation.
KASB research feel's the two potential triggers are yet to be priced in fully. The stock has remained flattish in the last six months. This gives an opportune entry point to upside of 51% from last close to our revised TP of 273/sh.
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Nishat Power Limited (NPL)
During the period of Nine months, the Company had turnover of Rs 7,879 million (March 2020: Rs 9,460 million), against operating cost of Rs 5,314 million (March 2020: Rs 4,485 million) resulting in a gross profit of Rs 2,565 million (March 2020: Rs 4,975 million). The Company earned profit before tax of Rs 2,125 million compared to Rs 3,784 million in the same period last year. The current period’s net profit after tax amounts to Rs 2,125 million resulting earnings per share of Rs 6.00 compared to profit after tax of Rs 3,784 million and earnings per share of Rs 10.69 in the same
period last year.
The payment of receivables is an integral part of the Master & PPA Amendment Agreement and that the total outstanding overdue amount on 30th November 2020 will be paid in two instalments, with 40% upon notification of tariff determination by NEPRA (comprising 1/3rd cash and 2/3rd financial instruments of PIBs and Sukuks) and the remaining 60% payable six (6) months thereafter through the same method as that of the first instalment. The parties agree that above mechanism will be followed without affecting the right of the Company to receive late payment
interest under the PPA as amended.
As per KASB recent research report, NPL once received full amount of receivables will translate into 31 Rs/share which we can assume for a good pay out in the upcoming Financial Year. As per which I believe the stock price is highly undervalued and can have significant room to grow.