Morning Shout released by KASB Securities Limited and Economics Research

Karachi, July 20, 2012 (PPI-OT): PSMC: Price yet to reflect future earnings downtrend

According to KASB Securities Limited,

• Recent sector newsflow regarding slowdown in booking orders in July, post latest round of price-hike and relaxed import policies, reinstates KASB Securities Limited’s view that auto sales are likely to suffer July onwards.

• Despite the negative newsflow, KASB Securities Limited believes Pak Suzuki Motor Company’s recent stock price run (up 19% and outperforming the index by 13% in the last 1- month) is reflective of strong 2Q12E result excitement, where KASB Securities Limited expects earnings to grow by 4x YoY/ 24% QoQ to PRs8.9/sh.

• EBITDA margins are expected to clock in at a strong 7% in 2Q12E, driven by (1) 69% YoY jump in sales and (2) increase in prices in Apr-2012 to pass-on FX costs.

• However, KASB Securities Limited believes result-related excitement is likely to lose steam postannouncement and reiterate U/P on the stock with a PO of PRs86/sh given (1) potential downtrend in earnings driven by expected decline in sales, and (2) lower pricing power going forward.

• Key upside risks are (1) possibility of a new variant launch in place of Alto (discontinued since July-2012) and (2) extension of Punjab taxi scheme in FY13E.

Negative newsflow on auto sector ; Re-iterate U/P on PSMC
Recent sector newsflow regarding slowdown in booking orders in July, and rise in used cars import by 3.3x YoY to ~56k units, reinstates KASB Securities Limited’s view that auto sales are likely to suffer July onwards. KASB Securities Limited attributes the decline to the impact of (1) latest round of price-hike in June-2012, (2) relaxed import policies, (3) ban on CNG kits import and (4) completion of Punjab Taxi Scheme orders. Despite negative newsflow, Pak Suzuki Motor Company’s recent impressive stock price performance (up 19% and outperforming the index by 13% in the last 1-month) is reflective of strong 2Q12E result excitement, in KASB Securities Limited’s view. KASB Securities Limited expects earnings to grow by 4x YoY/ 24% QoQ to PRs8.9/sh, taking 1HCY12 earnings up 4.7x YoY to PRs16.1/sh. However, KASB Securities Limited flags caution as PSMC stock price is yet to incorporate potential decline in sales in 2HCY12E, and lower pricing power for PSMC, in KASB Securities Limited’s view.

2QCY12E: Multi-year high earnings on improved margins
KASB Securities Limited expects EBITDA margins to clock in at a strong 7% in 2Q12E, driven by (1) 69% YoY jump in sales and (2) increase in prices in Apr-2012 to pass-on FX costs. Improved sales for PSMC (up 48% YoY in 1HCY12) were mainly on account of completion of taxi scheme orders in Jun-2012 where close to 13k units sold in 1HCY12 are likely to be attributed to the same. Moreover, Suzuki raised prices by ~2% in Apr-2012 to more than offset the rise in FX cost, as benefit of relatively stable yen in Mar/April should further help boost margins in 2QCY12E.

Expect lower earnings trend in 2HCY12E
KASB Securities Limited believes result-related excitement is likely to lose steam post-announcement given (1) potential downtrend in earnings (by 66% HoH) driven by expected decline in sales (on discontinuation of Alto and taxi scheme) and (2) lower pricing power, going forward. Latest reported data on used cars imports indicates majority (44%) of units belonged to small-to-mid sized segment (specifically targeted by PSMC). As a result, in a weak demand scenario for locally assembled cars, PSMC lacks sufficient pricing power to pass-through FX costs going forward, where recent pressures on PKR /Yen (5.5% depreciation since mid-May 2012 to date) could increase challenges faced by the company. KASB Securities Limited reiterates U/P on PSMC with a PO of PRs86/sh, with the stock trading at CY13E P/E of 7.6x at current levels.

KASB Securities Limited believes (1) a new variant launch in place of Alto (which has been discontinued since July- 2012) and (2) extension of Punjab taxi scheme are key drivers that could provide upside to KASB Securities Limited’s earnings estimate.