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Pak Elektron (PAEL): 4Q2018 EPS of Rs0.1, -88% YoY (-66% QoQ); (In-line with expectations)

 

• Pak Elektron (PAEL) announced its 4Q2018 earnings where the company’s result came broadly in-line with our expectations.
• Earnings in 4Q2018 declined YoY mainly on the back of lower gross margins, down 3.6ppts to 24.6% due to higher input costs and higher financial charges on the back of higher interest rates.
• The company had a significant decline in distribution and admin expenses in 4Q2018. This was on the back of lower advertisement and promotion expenses, as per channel checks.
• 2018 had been a challenging year for the company in terms of economic headwinds. Intense competition, weak buying power of consumers and lower aggregate demand led to lower volumes where appliances segment witnessed over 7% decline in 2018. Most notable decline was in microwave and refrigerators which fell ~21% YoY to 57k units and ~12% YoY to 410k units, respectively, as per channel checks.
• Power division which constitutes 25-30% of PAEL’s total sales also had a dull year where energy meters sales fell ~22% to 781k units while EPC contracting and switch gears in rupee terms fell ~16% and ~9% to Rs2bn and Rs3bn, respectively.
• Gross margins during the outgoing year remained under pressure owing to significant PKR devaluation of 20% in 2018 which increased the cost of doing business for the company. This led to lower gross margins, down 4.8ppts to 24.6%.
• We flag, 1) increase in raw material costs and the company’s inability to pass it on, 2) greater than expected PKR devaluation against US$, 3) higher financial charges to fund working capital and 4) greater competition due to new entrants as key risks for PAEL.