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HTL: Weak 1Q earnings will create an ideal entry point

HTL: Weak 1Q earnings will create an ideal entry point
 
HTL has appreciated 69% after hitting a low of PKR 17.0 in Aug-19 and 32% since we initiated coverage on September 20th with a strong BUY rating. Price recovery was driven by strong earnings recovery where the company posted bumper earnings for 4QFY19 at PKR 2.68/share, up 1.44x YoY.
 
Pre-selling and local blending led to robust earnings growth in 4QFY19
  • Robust growth in 4QFY19 earnings was primarily driven by two factors (i) significant sales of locally blended mineral lubricants and (ii) pre-selling as company offered a one-time credit facility to its distributors in order to allow them to benefit from lower product prices before the enactment of Finance Act 2019-20.
However, sales will likely take a dip in 1QFY20
  • We believe sales will take a dip during 1QFY20, falling by 38% YoY before normalizing. Gross margins will likely clock in at 25% during 1QFY20. We expect the company to post an EPS of PKR 0.55/share during 1QFY20. Any weakness in stock price following 1QFY20 results shall be considered an ideal entry opportunity.
FY20 volumes will likely by down by 18%
  • We update our volumetric assumptions and assume FY20 volumes to remain equal to FY19 volumes excluding the pre-selling quantum. This translates into an 18% YoY decline in FY20 volumes since we estimate pre-selling quantum during 4QFY19 at c. 2.75mn litters.  
We chose to wait to see market response of mineral lubes
  • Mineral lubricants have witnessed impressive volumes during 4QFY19. However, we opt to wait for 2-3 quarters before we revise up our overall volumetric sales assumption, in order to judge the market acceptance of mineral lubricants and their impact on volumes of HTL’s premium products. The company targets to have 30%-40% share of locally blended lubricants in its product mix in FY20 and aims to increase this percentage to 70% in the future.
Our revised June-20 TP is PKR 65/share
  • We have revisited our investment case after incorporating detailed accounts for FY19 and our recent discussions with the management. Our revised FY20/FY21 EPS are PKR 5.7/7.7 up from our previous estimates of PKR 5.4/7.5. Our revised June-20 TP of PKR 65 offers a upside of 124%, along with a dividend yield of 10%.  The stock is currently trading at FY20 P/E multiple of 5.1x.
Underlying
Hi-Tech Lubricants

Hi-Tech Lubricants Ltd. Hi-Tech Lubricants Limited is a holding company. The Company's principal activity is to import and distribute petroleum products. Hi-Tech Blending (Private) Limited, a subsidiary of the Company, constructs, owns and operates a lubricating oil blending plant.

Provider
Akseer Research (Pvt) Limited
Akseer Research (Pvt) Limited

Akseer is a Research & Analytics firm based out of Pakistan that specializes in Equity Research and Corporate Finance. Our team has exposure to a wide range of sectors including Economy, Banking, Telecommunications, Retail, Real Estate, Construction and Materials, Pharmaceuticals, Food, Energy, Chemicals and Petrochemicals. We have experience of covering companies in Middle East, Americas, Far East and South Asia.

Analysts
Muhib Ur Rasool

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