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Pakistan Alpha (BOP & PREMA, Nov 04, 2021)

AKD - Pakistan Alpha BOP: New overshadowing the old · Since it went into existential crisis back in 2008, amid massive asset quality deterioration, The Bank of Punjab has made significant strides in beefing up its capital base, expanding its branch network and becoming 10th largest bank by way of deposit size and 9th largest by way of branch network. The bank operates with a branch network of 640 branches which has grown at a CAGR of 10% over the last 5yrs, despite significant capital constraints. Over the same time, the book size has witnessed a CAGR of 18%. Meanwhile, the deposit base has registered a CAGR of ~19% where the bank currently holds a market share of ~4.5%, as opposed to ~4.0% in CY15. · This growth in book size has trickled down into profitability growth where the return on equity is expected to average between 15% - 16% between CY21—CY24 as opposed to average realized ROE of ~11%. Similarly, ROA which averaged 0.6% over the past 4 years is expected to average around 0.8% over the next 4 years despite a significantly bloated book size. The growth in earnings is likely to be driven by i) expansion in book size, ii) improvement is deposit mix and iii) solid support from non core income. · The asset quality, though has improved significantly markedly from CY15, where NPL ratio stood at 22.8%, to currently stand around 13.9% (net infection ratio), still lags behind the comparable banks where the infection ratio averages around 8%. Some confidence comes from the coverage ratio, which currently stands ~86% and is expected to increase over the medium term to ~89%. The bank’s loan book has depicted a CAGR of ~12% since CY15 and consequently, the current ADR stands ~50% which will allow the bank to avoid additional tax . · The bank is aggressively working on to improve its deposit mix and the efforts have resulted in CASA improving to 71% as of Sept’21 as opposed to average CASA of ~64% between CY17—CY20. We expect the focus to raise quality deposits remain sharp going forward and foresee the same improving to ~75% by CY24. One threat emanates from the implementation of TSA which can not be discounted where ~60% of the total deposits are GoP related. · TSA risk aside, the bank is well placed to maintain its growth trajectory. The improved fundamentals haven't yet been picked by the market where the current P/B of 0.39x is at 40% discount over its last 5yr average. PREMA: An interesting story of growth · We have a bullish stance on PREMA which emanates from i) high growth in production capacity, ii) rising market share of pasteurized milk iii) rising composition of value added products, and iv) diversifying product portfolio as the company plans to add allied foods category in its portfolio. · At-Tahur (PREMA) is a vertically integrated company which has a large footprint in central and northern region of the country. The company started with a herd size of mere 500 animals which has now grown to ~4.5k animals (~50% of them fully mature to produce milk) as of 1QFY22 whereas we expect the number to exceed 5k animals by the end of FY22. The milk production in 1QFY22 stood at 4.6mn liters (12.3%YoY) whereas we expect the production to increase by 15.8%YoY to reach at 5.7mn liters in the upcoming quarter and exceed 6mn liters by the end of FY22. With legislation to curtail the sale of unpasteurized milk in Punjab, the company has landed in a sweet business environment where it can easily increase its footprint in the current vacuum. · The gross margin of the company has exceeded 30% in the last 2 quarters due to the rising proportion of high margin value added products in the product portfolio. The company has introduced a wide range of products in the span of 2-3 years which includes package milk (pasteurized), low fat milk, yoghurt (plain, sweetened & flavored) and newly added flavored milks which are also marketed as healthy substitutes to carbonated drinks. The proportion of value added products in the product portfolio has increased from 10% to 30% as of FY21 where as the company plans to increase it to 50% by FY23 as it plans to add new category of allied food products. · Going forward, the company has plans to gradually increase its footprint to other regions, especially in south where there is a large potential to capture the market share. The company has posted an NPAT of PkR221mn in 1QFY22, translating into PkR1.11/sh (bonus adjusted), growing by 4.27xYoY/2.7xQoQ. We expect the earnings in FY22 to clock in at PkR3.23/sh (+143%YoY) owing to increasing milk production leading to higher sales of milk and rising share of value added products enabling the company to fetch pricing power. Applying a conservative P/E multiple of 15x, we derive the fair value of PREMA at PkR49/sh, implying an upside of 78.2% from the last close. The stock is currently trading at undemanding P/E of 8.5x. AKD Research