EUR 10.00 For Business Accounts Only

PAEL: Power division remains a pain in 1HCY18

Management of PAEL conducted an analyst briefing going over 1HCY18 operational parameters, coupled with guidance on CY18 results and outlook for additional business lines. Key highlights were: 1) the company has issued gross sales guidance aiming to reach topline of PkR44.95bn (+6%YoY) where tepid growth results from both segments undergoing heightened competition, 2) power division continuing to lag, expected to constitute 32% of Gross sales for CY18 arising from a slowdown in power transformer/energy meter/switchgear business revenues to punch through 2/3/6%YoY growth, and 3) incremental CAPEX to initiate additional business lines in the appliances business, where PEL intends on expanding its brand to the mid-tier LED and washing machine segments. We retain a BUY stance on the stock where at present levels the stock trades at CY18/19F P/E of 5.9/4.9x.

Earnings guidance for CY18: Management re-iterated a terse FX situation as being a dampener to earnings (~70% of material COGS are imported) where every 1% depreciation in the PkR vs. US$ translated to a PkR100mn reduction in gross profits. Timing of devaluation are crucial as increased cost of imported inventory materials are difficult to pass-on for products past their prime selling season, with the company aiming to raise appliance prices to maintain margins by Jan'19 on inventory sources in the latter half of CY18.

Balance sheet improvement is ongoing: PAEL remained adamant on its debt re-payment plans, aiming to continue the trend set in CY17 (PKR2.25bn reduction in short term loans), while limiting CAPEX plans to low value, staggered outlays, avoiding an capital raising exercises over the medium term. In the case of commencing LED and washing machine business, PAEL intends on committing PkR10mn and PkR500mn for CY18-19. This sum is paltry when compared to PkR1.83bn in CAPEX over CY17 and our 5yr average projected annual CAPEX of PkR1.45bn. Only in the second phase of LED manufacturing does PAEL plan on manufacturing printed circuit boards (PCB), leading to CAPEX of PkR100mn. Due to provision of tax credits for CAPEX activity undertaken in previous years, the company stands to utilize tax credits of PkR2.5bn till CY20.

Competition is heady: On the competitive front, both business lines are undergoing intensifying pressures, where Arcerlik (post assimilation of Dawlance business operations) has aggressively pushed products to market. Additionally on plans by its listed peer WAVES to expand its sales footprint, PAEL management were largely dismissive of the company making inroads to market in any segments apart from deep freezers, their traditional home ground (28% market share for WAVES vs 11% for PAEL). As to news flows showcasing additional entrants in domestic appliance manufacturing, management postured for headway on JV's with technically competent foreign players to manufacture goods in the country.

Investment Perspective: Issues of working capital, PkR depreciation and a general slowdown in power division sales make for a tough investment environment, at least till some clarity on the external front emerges (IMF program, future of public sector power division spend). Entry into the mid-tier TV (LEDs from 32-55inches) and washing machines (auto & semi-automatic) may not be the answer here, particularly when matching imported or Chinese offerings. That said, we retain a fundamental Buy stance on the stock, despite which, citing structural deficiencies in the demand scenario, our short term outlook on the stock remains largely sanguine.

AKD Research