AKD Securities Limited – Pakistan Alpha (October 21, 2021)

Karachi, October 21, 2021 (PPI-OT): PAEL and WAVES: Benefitting from changing consumer dynamics

Shipping disruptions have opened up consumer electronics’ market for domestic players where in 1HCY21, appliances sales revenue have registered an increase of 59.7%YoY to PkR29.0bn outshining imported appliances sales that grew 42.3%YoY during similar period. Interestingly, demand shift towards local players has been more prominent in the case of refrigerator sales where imports are +9.6%YoY only – Refrigerators contribute 40% to overall sales of Pak Electron Limited (PAEL).

Eyeing robust growth outlook, local manufacturers refrained from complete pass-on of raw material price hikes (Copper/Steel: +30.7/14.5% CYTD), translating into lower margins of 21.8% in 1HCY20 compared 1HCY20/1HCY19’s 23.0/24.0%. However, in case of PAEL, the company has streamlined other costs (GMs at RM stage for CY21 and CY20 stood at 25.7% and 32.6% respectively whereas overall GMs stood at 21.4% and 22.0% respectively).

The management for PAEL expects increased urbanization to augment power division sales going forward where in 1HCY21 sales of power products have almost doubled from previous 2y avg. sales.

Waves Singer Pakistan Limited (WAVES) has announced the plan to move its factory to new location for which land has been acquired and construction is in progress. First phase of construction and relocation is expected to be completed by 1QCY22. The whole project is to be financed by right issue of PkR1.4bn. The existing land, spread over 61.9 Kanals, is planned to be converted into a residential project in Lahore. The fair value of the land is estimated from independent sources, and on a relative basis, stands at PkR1.3bn or PkR4.8/sh. Debt to Equity of the company stands at 0.63x whereas operating cash flow stands at PkR203mn (PkR0.72/sh) – reflecting financial strength of WAVES to commence such project.

WAVES has recently closed a contract with Coca-Cola Corporation for supply of products worth PkR975mn which is likely to increase corporate sales prospects for the company. To highlight, corporate sales contribute ~PkR1bn in sales historically where the management expects contribution surpassing PkR2bn going forward.

PAEL and WAVES are currently trading at a P/E of 8.0x and 7.3x respectively, cheap compared to other companies having an orientation towards consumers and is trading at a P/E of +10x.

IMAGE: All dressed up to impress further!

Image Pakistan Limited (IMAGE) is poised to be a prime beneficiary of the improving consumer demand, led by the rebound in economic growth. Additionally, company plans to introduce new product lines, expected to provide an additional thrust to topline. To note, company’s topline has grown with a CAGR of 61% in last two years to PkR1bn led by increased network of stores, while profit after tax increased with a CAGR of 48% to PkR115mn with gross margin averaging at impressive ~50% for last 3 years.

Moving forward, company expects to open 10 more stores during FY22, taking the total store count to 17 around the country, entailing a CAPEX of PkR400mn, expected to contribute significantly towards management’s target of PkR2bn in annual sales for FY22. The company boasts of a strong presence online which had helped it grow immensely during COVID-19 with online sales witnessing an increase of 6x, contributing 65% to the topline, however, the contribution has subsided to 43% for FY21. We expect the online arm to continue to support the business particularly as company also forays into selling internationally through Amazon. To note, export sales for FY21 were recorded at PkR38mn. Company recently concluded a right share issue of PkR640mn in order to contribute towards CAPEX for the upcoming stores while the company is also planning to import embroidery machines in order to expand its product line. Moreover, management expects to expand the product line by introducing halal cosmetics and perfumes, likely to improve the gross margins given the segment offers higher margins.

With expected sales of PkR2bn for FY22 and using net margins of 9% for FY22 (against 11% for FY21 to incorporate increasing cost of cotton), we arrive at expected EPS of PkR1.8 for FY22. For target P/E multiple, we provided 60% weightage to P/E multiple of consumer sector and 40% to current market multiple and have arrived at target P/E of 16.3, resulting in a target price of PkR29.4/sh, providing 56% upside to last close.