Pakistan International Bulk Terminal achieved a utilization level of ~80% in 9MFY21

After having a couple of tough years, tides have turned in favor of PIBTL as the company has achieved a utilization level of ~80% in 9MFY21. Note that the company achieved utilization level of 98% in 2QFY21 due to increased demand from local industry but higher imports in 1HFY21, given the expected rise in coal prices amidst supply chain disruption, led to the decline in cargo handling in 3QFY21.

Going forward, we expect the company to achieve utilization level of over 95% in the next two years given the increased demand from cement and power players. It would be no surprise for us if the company go ahead with the expansion plan to enhance its handling capacity by 4.0Mn to 16.0Mn tons given the upbeat demand from the cement industry. The expansion should cost around PKR 8.5Bn (USD 50Mn for 10 acre land and USD 6Mn for equipment) and maybe financed through a combination of 50/50% debt/equity due to the higher debt/equity ratio of 85%. Although we haven’t incorporated the expansion in our valuations but it would be an upside risk to our current price target.

To add to the attraction, the company trades at FY21/22/23 EV/EBITDA of 8.0/5.8/4.4x and offers an upside of 31.1% to our Dec’21 TP of 13.5/sh.

Capacity enhancement makes all sense: With the strong demand from local cement and power industry, the company was able to achieve utilization level of 98% in 2QFY21 but higher imports in 1HFY21, given expected rise in coal prices amid supply chain disruption, led to the decline in cargo handling in 3QFY21. Going forward, we expect the company to achieve utilization level of over 95% in the two years due to the increased demand from local cement and power industry. It would be no surprise for us if the company go ahead with the expansion plan to enhance its handling capacity by 4.0Mn to 16.0Mn tons given the strong demand from the cement industry. The expansion should cost around PKR 8.5Bn (USD 50Mn for 10 acre land and USD 6Mn for equipment) and maybe financed through a combination of 50/50% debt/equity due to the higher debt/equity ratio of 85%, in our view. Note that we have not incorporated the expansion in our valuations as the company has not disclosed any formal expansion plan. Further capacity enhancement would be an upside trigger to our valuations.

Exchange gain to support earnings in 3QFY21: The 18.7/35.3% QoQ/YoY decline in cargo handling in 3QFY21 would be compensated by exchange gain of ~PKR 323mn on US denominated debt as rupee appreciated by 5.0% QoQ. Hence, we expect the company to report earnings of PKR 0.25/sh in 3QFY21, taking 9MFY21 earnings to PKR 1.0/sh.

Similarly, gross margins are expected to remain muted during 3QFY21 to 27% due to the USD denominated handling charges and overall decline in handling cargoes.

Investment Outlook: We expect company to remain beneficiary of 1) resumption in economic activities, 2) dividend initiation post repayment of long term debt, and 3) higher utilization levels of over 95% amid higher demand from cements and power players that make economic sense for the company to increase its capacity to 16.0Mn tons. In the near term, the company is expected to benefit from decline in both domestic and international borrowing rates due to outbreak of COVID-19 which would keep company’s profitability intact.

Key risks include 1) suspension of court order which restricts coal handling at KPT, 2) delay in expansion which would be a threat to company’s profitability and 3) USD depreciation post repayment of foreign debt which would dent company’s revenue due to USD denominated handling charges.

Courtesy – BMA Capital Management Ltd.

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