Al-Ghazi Tractors – Key highlights for CY19

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AGTL posted CY19 NPAT of PKR978mn (EPS: PKR16.87), down 60% yoy, which was led by a 6ppt decline in gross margins to c.18% and higher finance costs (up 3.2x yoy). During 4QCY19, however, the company posted a net loss of PKR311mn (LPS: PKR5.37). During 9MCY20, AGTL posted a NPAT of PKR889mn (EPS: PKR15.34), down 31% yoy from SPLY.

Key highlights for CY19

The company sold 15,719 units during CY19, which were down 34% yoy. Total industry sales during the year fell by 35% yoy to 41,156 units led by a decline in farmers’ income, which is attributed to (i) the slow growth in agrarian economy (growth of 0.9%) due to poor performance in some major crops of -4.4%, (ii) lack of subsidies from the government, (iii) weak macroeconomic environment, and (iv) import duties levied on parts (c.3% of value).

According to the management, the gross loss incurred in 4QCY19 was due to various factors such as weak volumes, fixed costs and measures taken in the previous quarter.

Guidance for future sales and profitability

Following the easing of countrywide lockdowns (May onwards), industry sales have risen by an average 28% mom. The management expects the company to outperform the ongoing year in CY21, with sales to pick up from January 2021 due to new-year seasonality, recently notified SRO (PKR1.5bn subsidy) and uptick in construction activities. However, the company still awaits clarification on GST subsidy from the government, before passing it on into prices.

With the high localization level (91% on parts) and improving macro conditions, the management expects GMs to remain healthy during CY21 (c.22% in 9MCY20). However, the company is facing supply issues due to cash-flow problems being faced by its vendors, who are asking for a delivery lead time of 4 months vs. the average 2 months’ time period (scarce raw materials).

In order to arrest the declining market share, the management has taken up a few new initiatives (could not disclose), while promoting their products through various media outlets. AGTL is also taking initiatives to increase exports (although the exports market is deemed tough due to the higher technological and better quality tractors in the market, despite Pakistan producing one of the cheapest tractors globally).

With regards to dividends skipped during the 9M period, the management did not guide on future payout policy (5yr average historical payout ratio of over 150%). According to the management, AGTL is presently in growth phase, where the dividend policy will be contingent on various factors.

AGTL is presently working on the development of new models, which will have better technologies.

The new management seemed optimistic about CY21 and is working toward overcoming the shortfalls of previous year. The new CEO, Mr. Raheel Asghar had previously been associated with both INDU and HCAR.

We have an Overweight stance on the Tractor sector because we think that the improvement in famer dynamics (crop performance, lower input and abolishment of GST tractors) will boost overall sector sales and profit growth.

We have a Buy stance on AGTL with a December 2021 TP of PKR455/sh.

Reported by Intermarket Securities Limited. 

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