Millat Tractors Limited (MTL): Improvement in farmers’ liquidity to drive volume growth; Initiating Coverage with a ‘Buy’
- We initiate our coverage on Millat Tractors Limited (MTL) with a ‘Buy’ rating and a SoTP based Target Price (TP) of Rs750 (Jun-2021). Our valuation values the core business at Rs719 on DDM methodology, investment in Hyundai at Rs20 and other subsidiaries at Rs11. Our TP implies an upside of 32%. The FY21E and FY22F D/Y is estimated at 9% and 13%, respectively.
- We expect MTL’s earnings to grow by 93% YoY in FY21F, followed by 44% YoY growth in FY22F. We expect growth in earnings to be driven by higher volumes, which we expect to grow by an average 31% over the next two years.
- We have built-in the impact of Covid-19 with 32% lower average monthly sales during Mar-Jun 2020 compared to the preceding 6-months sales. We estimate gross margins of 16.4%/16.7% during FY20E/21F (pre-Covid-19 estimate of 16.7%/17.4%).
- We expect better farmer liquidity of around Rs100bn for the coming year on account of multiple facets, including (1) lower local urea prices, (2) falling fuel prices, (3) higher wheat support price and (4) further decline in interest rates, to drive growth within the Pakistan tractor space. The oligopolistic nature of the industry also allows the tractor manufacturer a high pricing power to pass through unexpected cost increase.
- Key triggers for the stock are (1) better-than-expected crop output, (2) announcement of subsidized tractor schemes by the federal and/or by the provincial governments and (3) release of stuck up sales tax refunds.
- Key other risks to our thesis include (1) unexpected decline in agriculture output, (2) higher than expected sale drop due to Covid-19 and (3) increase in sales tax.
Millat Tractors is engaged in the assembly and manufacture of agricultural and industrial tractors, implements and multi-application equipments including diesel generating sets, forklift trucks, prime movers and other related products. Co. is organized into three business units: the Tractor segment, which deals with assembling and manufacturing of agricultural tractors, implements and multi-application products; the Equipment and Parts segment which is engaged in the business of manufacturing of automotive, agricultural and industrial vehicles parts and components; and the Castings segment, which is engaged in manufacturing of castings for tractors and automotive parts.
Topline Securities is one of the fastest-growing brokerage houses in Pakistan. It has strong Equity Brokerage, Economic/ Equity Research, Commodity Trading and Corporate Finance & Advisory functions.
Topline Securities has been endowed with numerous awards by renowned international financial organizations. The highlights of which consists of the award for ‘Best Local Brokerage House of Pakistan’ by Asiamoney Brokers Poll (the largest Asia-focused equity services provider poll) in 2016 and ‘Best Equity Brokerage House’ by CFA Society Pakistan in 2015.
Previously, Topline Securities held the title for ‘Best Brokerage House’ for 4 consecutive years (2011-2014) by Asiamoney Brokers Poll. Other awards include the ‘Best Salesperson’ award by Asiamoney for 6 consecutive years (2011-2016), the ‘Arabia Fast Growth 500’ award and ‘Pakistan Fast Growth 100’ award in 2012 and 2013 by AllWorld Network.
JCR-VIS, a credit rating agency providing independent rating services in Pakistan has assigned initial rating of “A-2” for short term and “A” for long term to Topline Securities. Topline Securities is registered as Underwriter, Book Runner and Research Entity with Securities & Exchange Commission of Pakistan (SECP).
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