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Pak Suzuki Motor Co. (PSMC): 4Q2018 LPS of Rs1.15 vs EPS Rs8.86 in 4Q2017; DPS of Rs3.16 for 4Q2018 (Below expectations)

• Pak Suzuki (PSMC) reported its 4Q2018 earnings wherein the company posted loss of Rs94mn (LPS Rs1.15 vs EPS of Rs8.86 in the same period last year). Earnings are below expectations due to significantly higher margin attrition. This is despite a tax reversal during the outgoing quarter. The company also announced a cash dividend of Rs3.16.
• Despite 8% YoY decline in volumes in 4Q2018, net sales of the company rose by 6%YoY due to multiple price hikes in 2018. Average revenue per car is up by 15% YoY.
• Company’s cost of sales rose by 12% YoY which led to a significant gross margin compression. Gross profit fell by 56% YoY, dragging gross margin down by 4.6ppts YoY to 3.2%.
• We attribute the decline in gross margins to sharp PKR depreciation during 2018, where PKR has devalued by 24% between Dec 2017 and Dec 2018. To note, PKR devaluation does not only increase cost of imported materials but also prices of components acquired from local vendors.
• Administrative expenses also rose by 34% YoY but remained relatively flat QoQ while the company booked finance cost of Rs237mn (reversal of Rs72mn in 4Q2017) which further dragged the quarterly earnings down.
• Moreover, other income is down 57% YoY as interest income from investments declined, we believe. The decline is a result of reduction in advances from customers that were used to earn interest income, in our view. To note, Cash had declined to Rs892mn as of Sep-18 compared to Rs9.2bn in Dec-18.
• The company booked a tax reversal of Rs313mn which helped keep the loss restricted. We await management clarity to ascertain the reason for this reversal.
• For 2018, earnings fell by 66% YoY due to 3.6ppts margin depletion, 44% increase in administrative expenses as well as 35% decline in other income.
• We outline 1) further unfavorable movement in exchange rate & commodity prices, 2) regulatory changes, 3) increased competition from existing and new players and 4) disruptions in operations of principal company, as key risks for the company.