Packages Limited (PKGS): Earnings revised downward 'Maintain Buy'
- We revise down our earnings forecasts for Packages (PKGS) after incorporating 3Q2018 result, announced yesterday.
- The company’s 9Q2018 result fell short of our expectations on account of lower than expected 1) dividend income from Tetra Pak, 2) gross margins, 3) operating profit margins of Packages Mall and 4) Nestle Pakistan (NESTLE) dividend income. However, we maintain our ‘Buy’ call on PKGS.
- For 2018/2019/2020, we now expect PKGS to post consolidated EPS (diluted) of Rs26/15.7/18.5, down by average 54% against our previous estimates.
- Margins will be lower due to higher input costs on the back of recent rupee devaluation and higher commodity prices, we believe.
- Moreover, we expect lower contribution from Packages Mall, after incorporating lower than anticipated operating profit margins.
- We now expect Packages Mall to contribute EPS of Rs2.5/2.8/3.4 in 2018/2019/2020, down by average 69% against our previous expectations.
- We expect Tetra Pak dividend income to come in at Rs2.5bn in 2018, down by around 17% from our earlier estimates. To recall, PKGS will not be receiving any dividend income from Tetra Pak from 2019 onwards as per the arrangement.
- With no dividend income from Tetra Pak, we estimate significant fall of 39% in PKGS earnings in 2019.
- We have also trimmed down our forecasts for NESTLE dividend income after incorporating NESTLE’s 9M2018 result where earnings of the company were marred by lower gross margins, down 3ppts to 34% and higher financial charges, up 68% YoY in 9M2018.
- We now expect NESTLE’s EPS to clock-in at Rs255/295/334 in 2018/2019/2020, down on average by 27% from our previous estimates. Consequently, we estimate NESTLE to pay dividend of Rs249/289/327 during the said period.
- No contribution is expected from Bulleh Shah Packaging (BSPL), a wholly owned subsidiary of PKGS (previously a join venture with 65% stake) as the company continues to suffer from higher cost of production, which we believe, will continue to put downward pressure on earnings due to hike in input costs.
- We flag 1) BSPL’s higher cost of production 2) decline in investment income and 3) higher than expected fuel & energy costs as key risks for PKGS.
Co. is a holding company which, through it subsidiaries, operates two businesses: packaging, and inks and lacquers. Co.'s packaging division is engaged in the manufacture and sale of paper, paperboard, packaging materials and tissue products. Co.'s inks and lacquers division manufacture and sale finished and semi finished inks and lacquers.
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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