A review of financial performance of Pak Suzuki Motor Co

PSMC posted a strong rebound in profitability in 4QCY20, amid improved volumetric sales and a sharp rise in gross margins to c.8.2%. We therefore revise our sales estimates for CY21/22f by 13%, and thus lift our December 2021 TP to PKR450/sh.

Despite an increase in international commodity prices and shipping freight, PSMC’s 4Q GMs were nearly at the same level as that of INDU. We believe the strong demand seen in 2MCY21 is likely to boost GMs further (estimated CY21 utilization to improve to 72% from 39% in CY20).

PSMC is trading at depressed valuations (P/E 5.3x) vs. peers (average 9.3x) and P/S of only 0.2x (vs. 0.6x for peers). Key catalysts for the stock are potential introduction of new models, relaxation in the minimum tax regime, and release of the new Auto policy.

Reiterate Buy with a new TP of PKR450/sh

We raise our CY21/22f sales and margins estimates for Pak Suzuki Motor Co. Ltd (PSMC) by 13% to c.110,000/118,000 units and 1ppt to 7.9%/8.4% respectively. This lifts our December 2021 TP from PKR330/sh to PKR450/sh – maintaining Buy rating. PSMC posted strong turnaround in 4QCY20 earnings of PKR12.27/sh, following eight quarters of losses – led by sharp margins recovery (second only to INDU), and uptick in volumes, growing by an average 14% mom since November 2020. Given the recent momentum, March sales are expected to top 10,000 units (first time since May 2019). The sequential improvement in PSMC’s working capital and reduction in short-term borrowings will further bolster the bottom line through much reduced finance costs, in our view. Lower-for-longer interest rates and overall economic recovery will maintain strong sales for the Economy segment cars (albeit lagged growth compared with the Premium segment).

Sales have found a new momentum

PSMC sales have so far not been dented by new entrants – from the launch of the Kia Picanto and Prince Pearl, and even the recent launch of the Changan Alsvin sedan that is priced close to Suzuki Cultus (1,000cc). PSMC volumes have averaged c.9,000 units per month CY21td, which can now cross the 10,000 units level in near future, in our view. Overall company sales have picked up steam, where noticeable improvement has been witnessed in Alto sales (successor of the Mehran) with over 8,000 units sold in the first two months of CY21. We assume volumes to have a 3yr CAGR of 6%, where we also account for growing competition in the Economy segment (following the launch of the affordable Proton Saga sedan, upcoming MG3 hatchback and Sazgar-BAIC d20), and potential disruption in sales during CY21 due to more strict lockdowns amid the third wave of Covid-19 (the latter being a major risk to our thesis) and global supply-chain issues in the Automobile sector.

Attractively priced vs. peers

PSMC is presently trading at attractive CY21/22f valuations, with an undemanding P/E of 5.3x/4.4x and a P/S of 0.2x. This compares well with peers, which are trading at average P/E of 9.3x and P/S of 0.6x. In terms of CY21f P/E, PSMC is trading at c. 5.3x, 43% discount to its peers. Key triggers for the stock price will be (i) a relaxation in duties and taxes in the upcoming Auto Policy (which are presently estimated to be as high as 30-40% of car prices), and (ii) swift rollout of new models such as the new Suzuki Swift, which will deter the impact of new entrants, in our view.

Courtesy – Intermarket Securities Limited

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