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Pak Elektron (PAEL): 3Q2018 EPS of Rs0.2, -51% YoY (-83% QoQ); (Below expectations)

• Pak Elektron (PAEL) announced its 3Q2018 earnings where the company’s sales underperformed our expectations. This was mainly due to lower than anticipated volumetric sales of appliances, as per our channel checks.
• While yearly appliances sales improved, it remained below our estimated sales as competition in the sector kept PAEL’s volumetric growth in check, we believe.
• Power division also suffered from lower than expected sales in 3Q2019. We believe that this was due to slowdown in real estate activities, thereby affecting construction of housing schemes, and temporary halt in govt. projects due to General Elections that led to lower sales of switch gears and EPC contracting.
• Gross margins of the company remained broadly in-line with expectations, though on yearly basis, margins contracted by 4.5ppts to 22.6%. We attribute this to higher raw material costs owing to PKR weakness against US$.
• In 9M2018, net sales were down 9% YoY while net earnings declined by 55%. Decline in net sales were on the back of lower appliances sales where refrigerator volumes were down by around 11% while air conditioners and micro waves volumes fell by 8% and 4%, respectively. 
• We flag, 1) increase in raw material costs and the company’s inability to pass it on, 2) greater than expected PKR devaluation against US$, 3) higher financial charges to fund working capital and 4) greater competition due to new entrants as key risks for PAEL.