Tractors sale rising in Pakistan

Tractors sales have seen a strong rebound ever since the announcement of the agriculture package in May – up 24% yoy during 4MFY21 to c.15,500 units. We believe factors for the turnaround will persist near-term, and hence we lift our FY21f industry sales forecast by 22% to c.45,000 units.

The recent approval of sales tax subsidy of PKR1.5bn (reduction of GST on tractors from 5% to 0%) will maintain the momentum, in our view. The present conditions are reminiscent of FY17-18, when industry sales rose c.50% yoy. This incentive, however, will last only until June 2021, unlike the previous time (constant since FY18).

We upgrade MTL from Neutral to Buy, with a June 2021 TP of PKR1,330/sh (up from PKR902/sh), while reinstating coverage on AGTL with a December 2021 TP of PKR455/sh. Our liking for both companies stem from their benign dividend policy (5yr average payout ratio of 140%) and very high ROEs (5yr average of 75%) courtesy the former and healthy profit margins.

Improving farmer dynamics lead to higher estimates

We raise our estimates on Millat Tractors (MTL) with a June 2021 TP of PKR1,330/sh (from PKR902/sh previously), while reinstating coverage on Al-Ghazi Tractors (AGTL) also with a Buy rating and December 2021 TP of PKR455/sh. Our liking for the sector emanates from rebounding farmer income due to (i) the government’s approval of the PKR50bn agriculture package announced in May, (ii) reduction in GIDC for fertilizer producers leading to lower prices, (iii) rise in minimum support prices on major crops such as wheat (to PKR1,650/40kg from PKR1,400), and, (iv) reduction in sales tax on tractors from 5% to 0%. During 4MFY21, tractor sales rose handsomely by 24% yoy to 15,211 units, where we believe that the momentum is likely to continue with the recent GST notification by the tax authority (FBR) in November, for the reduction to 0% from 5% until June 2021, and increase in construction activities post-lockdown.

MTL: Upgrade to Buy with higher volumes

We have raised our assumptions for MTL volumes in FY21/22f to c.30,000/32,000 from c.22,000/25,000 earlier. This raises our EPS estimates for FY21/22f sharply by c.85% on average. Our liking for MTL stems from: (i) increased market share during 4MFY21 to 67% from 63% in FY20, (ii) high dividend payouts and ROEs (5yr average payout ratio of 109% given lack of expansion opportunities, and ROEs averaging c.70%), (iii) localization levels of nearly 95% on average as many parts are sourced through group companies, (iv) investment in Hyundai Nishat Motors (expected to breakeven within 2-3 years) and (v) growing exports, as Pakistani tractors are the cheapest against those produced in China, Brazil and India (exports in FY20 rose to c.1,100 units from c.200 in FY19). As per the management, MTL is eyeing 10,000 units exports in the coming five years.

AGTL: Reinstate with Buy

We reinstate coverage on Al-Ghazi Tractors (AGTL) with a Buy rating (December 2021 TP of PKR455/sh), where we estimate volumes of c.17,000/21,000 in CY21/22f with gross margins of c.21% in both years. We expect AGTL to post CY21/22f EPS of PKR22.11/32.31, depicting a 3yr EPS CAGR of 38%. Like MTL, AGTL has a history of healthy dividend payouts, with a 5yr average of 166% and ROEs averaging c.80%. AGTL will equally benefit from the rebound in demand for tractors. However, with the recent changes in management, we await clarity on future dividend policy. Recall AGTL has not announced any dividends so far during CY20.

Courtesy –  Intermarket Securities Limited.

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