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SAZEW Engineering Works expects more models in the pipeline

Pakistan’s 3-wheeler (rikshaw) turned 4-wheeler assembler, Sazgar Engineering (SAZEW), is set to witness 168% earnings CAGR during FY24-26 owing to increased demand in both Petrol and Hybrid versions of the Chinese Haval brand.

Our Jun 2025 Discounted Cash Flows (DCF)- based target price for SAZEW is Rs1,613/share, providing a total return of 98% and a dividend yield of 8%.

Our liking for this stock emanates from (1) rising four wheelers sales to a monthly average of 700+ units compared to last six months average of 541 units, (2) Superior gross margins of +28% compared to other players margins of 9-11% (FY23) operating under the Auto Policy 2016-2021, (3) likely commencement of the local assembly of new models currently launched under testing phase, Tank and Ora, and (4) attractive valuation with FY25E PE of 3.1x, compared to sector average forward PE of 9.8x.

Rising four-wheeler sales to drive earnings exponentially: SAZEW is currently selling 700+ units per month, and in a recent analyst briefing, management highlighted the potential of touching over 40% utilisation, which could take monthly sales to 800 units, in our view. We have assumed 775 monthly units for FY25, bringing annual sales of 9,300 units (39% utilisation), up 76% from the FY24E level of 5,283 units. For FY26 and FY27, we assumed a growth of 5% in SAZEW 4-wheeler volumes.

Superior gross margins among auto players: SAZEW reported gross profit (GP) margins of 29% in 3QFY24; however, based on our work, primary margins during the same quarter remained around 38% in the 4-wheelers segment. Management anticipates margins to sustain owing to (1) tax benefits under Auto Policy till 2026 and (2) the company’s operations in the SUV segment, which is relatively lower price sensitive.

In our analysis, we have arrived at GP margins of 30% for FY25/26 after averaging 28% in FY24. Post FY26 or after the tax benefits’ conclusion, we assumed GP margins of 21%/17% in FY27/28.

Launch of new Models: SAZEW has recently introduced a high-end off-road SUV, “Tank,” and an electric vehicle, “Ora.” Both of these models are currently in the testing phase, and any success in testing can lead to the decision to assemble them locally. The company’s tank model is the top-selling SUV in China, with annual sales of 163k units in 2023.

Key risks to our thesis are (1) lower than expected auto sales, (2) launch of similar category models by other players, (3) currency fluctuation, and (4) change in regulatory duty structure. Furthermore, sponsors and management have a relatively newer experience managing the four-wheeler segment. We believe their restricted approach to addressing analyst/investor queries, except for analyst briefing, may delay the company’s efficient price discovery.

Valuation: We have used FCFE using DCF-based valuation methodology; based on that, we arrived at the Jun 2025 target price of Rs 1,613/share, suggesting a total return of 98% as of the July 4, 2024 closing price, Rs 849.75/share. On the PE valuation front, the auto sector (HCAR/INDU) has traded at a forward PE of 9.82x, 40% higher than the forward market average PE of 7x. Our target forward market PE for Jun 2025 is 4.6x, with a 40% premium, and the auto sector fair multiple reaches 6.45x. This suggests a Jun 2025 target price of Rs2,038 for SAZEW using FY26 EPS of Rs316, translating into an upside of 140%.

Dividend Outlook: Based on the recent analyst briefing, management indicated a soft dividend policy. Considering this, we believe the stock also offers a dividend yield of 8% in FY25 at a 20-25% payout ratio.

Courtesy – Topline Pakistan Research

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