Pak Elektron (PAEL) conducted its corporate briefing today, where the management discussed the company’s 9M2023 result and future business outlook. In 2023, the appliances industry faced challenges due to restrictions imposed by SBP on LC opening. However, the situation has improved now as import restrictions have been eased. As per the management, the decline in volumetric sales in 2023 was mainly due to the unavailability of raw materials.
Management believes sales will recover in 2024 due to removing import restrictions, improved consumer sentiments, reduced inflationary pressure, and the expected decline in interest rates.
In the appliances segment, management expects growth of 30% in refrigerators, 35% in air conditioners (AC), and 45% in deer freezers in 2024. These three products make up around 83% of total appliances division revenue. In terms of margins, AC and Energy meters are high-margin products.
The company holds a 20%, 8% and 4% market share in Refrigerator/Freezer, AC and Washing Machine respectively. The company is the market leader in the Transformers segment, with a market share of over 90%.
The company already has orders in the Power division worth Rs14-16bn, which covers half of 2024.
70% of the raw material is imported directly, and the remaining 30% is procured locally, which is also mostly imported by local vendors.
Company has effectively passed on the rising cost pressure by increasing prices by over 40% in 2023 to sustain margins. We expect PAEL’s gross margins to clock in at 27% in 2024.
As per the management, the cash conversion cycle in Power Division is expected to improve by reducing credit and inventory days from 37 days to 24 days and 80 days to 53 days, respectively. Similarly in Appliances Division, cash conversion cycle is anticipated to improve by reducing credit days from 126 days to 83 days and inventory from 128 days to 119 days.
The company aims to pay off all its long-term debt in 36 months from current levels of Rs4bn. To highlight, the company has paid a total debt of Rs8.5bn in 9M2023.
Management aims to reduce total debt to Rs9.8bn by 2024 from Rs14.6bn in 2023. We believe lower debt levels and lower KIBOR (2024F 18.7% on average) will bring savings of around Rs1/share in 2024.
The management aims for a Profit After Tax (PAT) of Rs1.3bn (EPS of Rs1.5) in 2023 and Rs3.4bn (EPS, please refer to our detail of Rs3.9) in 2024. We estimate PAEL to report an EPS of Rs1.6 for 2023E and Rs3.7 for 2024F. For details report title “Pak Elektron Limited (PAEL): Buy!; Better sales, margins & deleveraging to drive earnings” dated Nov 25, 2023.
PAEL is our top pick for 2024, and we maintain our Buy stance with a Target Price of Rs25/share. Currently, PAEL is trading at 2024F and 2025F P/E of 5.5x and 4.0x, as compared to the last 10-year average PE (Ex. 2020 Covid Year) of 9.6x, representing a discount of 43% and 59% respectively.
Courtesy – Topline Pakistan Research