Due to gradual economic recovery and changing dynamics of import business in Pakistan, we have re-evaluated Pak Elektron (PAEL) after our detail discussion with the management.
We have revised our earning estimates based on (1) volumetric recovery in appliances division, (2) deleveraging & expected fall in interest rate, (3) better power division outlook, and (4) improved gross margins.
PAEL is our preferred stock for 2024 with a Buy rating and Target Price of Rs25/share, offering a potential total upside of 47%.
Recovery in Appliance sales: We are expecting a recovery in appliances sales on the back of (1) improved supply situation due to easing off import restrictions, (2) likely improvement in consumer financing after interest rate cut, (3) improved farmer income, (4) recovery in construction activities and (5) low base affect of last year.
We expect PAEL’s appliances division to post volumetric growth of over 30% YoY in 2024F after witnessing a decline of over 46% YoY in 2023E. In absolute terms appliances sales after falling 26% in 2023E will recover by 64% to reach Rs41.3bn in 2024.
Deleveraging and falling interest rates: PAEL management aims to pay off all long-term debt within 3-4 years. The company has aggressively started deleveraging its balance sheet, as evident by the total loan, which has declined from Rs22.8bn in Dec 2022 to Rs14.3bn in Sep 2023. Furthermore, we expect the average 6-month KIBOR to come down from 21.6% in 2023 to 18.7% in 2024. This deleveraging, coupled with the likely fall in lending rates, is expected to result in savings of Rs1/share (27% of 2024F earnings).
Better Power Division Outlook: With some economic stability and fiscal space, we believe government is going to focus on improving existing transmission and distribution infrastructure which will lift the sales of power division. In 2024, we estimate a gradual 4% recovery in revenue from the power division, reaching Rs28.3bn. The power division contributes 41% to total sales in 2024.
Improvement in Gross Margins: We expect PAEL’s margins to improve at 27% in 2023 from 20% in 2022. This is mainly led by higher volumetric sales and the gradual pass-on of cost increase. Furthermore, the company has executed a fixed cost optimization program, resulting in savings of Rs0.5bn across both (Appliance and Power) divisions in 2023.
We expect margins to remain on the higher side due to passing of cost pressures to the final consumers, coupled with stability in the local currency and expected fall in inflation. This combination is anticipated to sustain margins at elevated levels.
Attractive Valuations: PAEL trades at 2024F PE of 4.8x and an 2025F PE of 3.5x, as compared to its 10-year average PE (Ex. 2020 Covid Year) of 9.6x, representing a discount of 50% and 64% respectively. Similarly PAEL is trading at 2024F and 2025F PBV of 0.4x compared to 10-Year average of 0.6x.
Key Risks: (1) unavailability of raw material due to import restrictions, (2) higher than expected PKR devaluation, (3) delay in interest rate cuts, and (4) more than expected competition.
