We reiterate our Buy stance on Pak Elektron (PAEL) with a Dec 2025 Target Price (TP) of Rs58/share, offering a potential upside of 38%. We are revising up our earning estimates for 2025-2026 on the back of (1) a better power division outlook amidst the export of transformers to the US and other countries, (2) volumetric recovery in the appliances division, and (3) a fall in interest rate to help both volumes and decline in finance cost. As a result, we revise our 2025/2026 earnings by 34-44% to Rs5.9/7.0 per share from earlier expectations of Rs4.1/5.2 per share.
Better Power Division Outlook amidst the onset of transformers exports: PAEL has recently started exporting power transformers to the USA and has received orders worth up to US$20mn (Rs5.6bn), with the annual potential to serve/execute US$50mn (Rs13.9bn) worth of orders per annum, as per our channel checks. These orders will be delivered next year in 2025, starting in the March 2025 quarter. We believe that higher duties on Chinese imports and higher lead time from Mexico give PAEL an edge in increasing its footprint in the American market.
Additionally, based on our channel checks, the gross margins on exports to the USA market are over 30%, compared to the 2023 overall power segment gross margin of 23.8%.
Furthermore, the government actively engages with potential investors to enhance the country’s Power Division. The key objectives include reducing energy losses and improving the country’s electricity distribution network. These measures will ultimately increase the sales of the power division in the medium term.
We estimate a net revenue growth of 40% from the power division, reaching Rs32bn in 2025 from Rs23bn in 2024. The power division will contribute around 46% to total net sales in 2025.
Recovery in Appliance sales: We are expecting a recovery in appliance sales on the back of (1) ease in import restrictions, (2) improvement in consumer financing amid interest rate cut, (3) improved disposable income of the public amidst lower inflation, (4) expected recovery in construction activities and (5) continuation in urbanization.
We expect PAEL’s appliances division to post volumetric growth of 20% YoY in 2025F after witnessing growth of over 30% YoY in 2024. In absolute terms, appliances sales will increase by 36% YoY to Rs38bn vs Rs28bn in 2024E.
Deleveraging and falling interest rates: PAEL management aims to pay off all long-term debt within 2-3 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 Rs16.1bn in Sep 2024. Furthermore, KIBOR has come down by 930bps to 13.4% from a peak rate of 22.7%. This deleveraging, coupled with a fall in lending rates, is expected to improve profitability by 36% or Rs2.1/share in 2025.
Gross Margins to Remain Stable: We expect margins to remain at 26.5% in 2025, in line with the 9M2024 trend, due to local currency stability and a scheduled inflation decline.
Attractive Valuations: PAEL is currently trading at Rs41.53/share, offering a potential total upside of 38% to our Target Price of Rs58 per share.
We have valued PAEL using an equal-weighted blend of the discounted cash flow (DCF) method and PAEL’s historical P/E multiple of 9.8x.
For DCF calculations, we have used a Risk-free rate of 12% and a Risk premium of 6% to arrive at a Cost of Equity of 18%.
Key Risks include (1) the unavailability of raw materials due to import restrictions, (2) higher than expected PKR devaluation, and (3) more-than-expected competition.
Courtesy – Topline Pakistan Research
