Karachi, September 14, 2021 (PPI-OT): BNL: Consumer exposure at attractive multiples
Established in 1984, Bunny’s Limited is one of the country’s leading confectionary related business. In order to consolidate its leadership status, the company has invested PkR300mn – PkR350mn in its manufacturing capacity to enhance it total production limit. The civil works have been completed and the machinery has already been imported while the first dry run of the new capacity is expected to be conducted in the coming weeks. The impact of higher capacity is expected to be realized from 2QFY22.
With country emerging from 4th wave of COVID-19 and resumption of economic activities like restaurants, schools and cinemas opening, the demand for company’s products is expected to revive which will likely coincide with company’s new production capacity coming online. Company’s sales are largely concentrated in Lahore and nearby areas, however with new capacity coming online, the management will be actively striving to increase its reach in the other areas of country, specially southern Punjab and KPK regions.
The company is also involved in co-manufacturing with some major local and international confectionary and food brands in the country such as Pepsi cola, Unilever (Wall’s) and Engro (Omore). In terms of revenue contribution, Snacks segment contributes 10% to overall topline with bakery segment responsible for the remaining 90%.
Despite offering a consumer exposure (both direct and indirect), the company trades at very attractive P/E multiple of ~11.0x as opposed to the industry average multiple of ~17.0x. Given robust demand outlook and increased penetration amid new capacities coming online, the company has enough growth opportunities to tap into which makes the current earnings multiples extremely attractive. If the scrip was to re-rate to average industry multiple, the scrip will realize an upside potential of ~54% on the last close.
LOADS: Boom in automotive industry
Our liking for the stock is based on; i) aggressive growth in OEM Sales and rising market share of new entrants; ii) focus on localization in upcoming auto policy’21; iii) Penetration in alloy wheel’s market; and iv) elevated margins on account of economies of scale and technological advancement.
The company supplies parts to major OEMs (INDU, PSMC, HCAR, MTL, Yamaha etc.). The exhaust systems are the primary breadwinners of the company, however, the margins on sheet metal components are higher. During 9MFY21, the big 3 OEMs (INDU, PSMC, HCAR) accounted for 82% of the total revenue. With current growing trajectory of growth, the OEM sales are expected to hit all-time high in FY22 and sustain that level in FY23. Hence we expect LOADS to follow the same trajectory of growth. In the long run, we expect the company to get additional contracts from new entrants as their incentives phase out.
In the upcoming auto policy’21, the govt. is taking major steps to increase the level of localization by introducing a condition of 30% value addition on imported raw materials which will be used in vehicle manufacturing in local market. In addition to this, the govt. will update the list of localized parts every 6 months. Once a part has been localized, it would make more sense for OEMs to procure it from local market to avoid high tariffs on import of localized parts.
The company is setting up an alloy wheel production facility which had been delayed last year due to the Covid-19 outbreak. The work has resumed in full swing (~70% of the work has been completed) and the management expects to make the plant operational in FY23. Once the production starts, the company will start supplying the alloy wheels to major OEMs, contributing significantly to the consolidated earnings. We have a positive view on LOADS given the plethora of growth projects. Hence, the scrip may come into the limelight, especially when the comprehensive auto policy is announced.