AKD Quotidian about — PSMC: Estimates Revision and TP Upgrade

Karachi, May 10, 2013 (PPI-OT): Following a better than expected NPAT of PkR362mn (EPS: PkR4.40) in I QCYI3, AKD Securities raise target price for PSMC to PkRI 78/share after raising earnings estimates across AKD Securities forecasts horizon by 36% to 44% as AKD Securities builds in higher gross margins, mainly on account of fall in JPY and downward sticky car prices. I

According to AKD Securities addition to an uptick in core earnings, a further catalyst to price discovery should arise from sale of land which should translate into a +ve EPS impact of PkR3.34 in 2QCYI3. Despite having gained 66%CYTD, outperforming the KSE-100 Index by 50% in the process, PSMC trades at a CYI3F P/E of 6.Ox (normalized; 6.98x) which is at a 23% discount to the AKD Universe and also lower than the stock’s average normalized historical PIE of 7.8x for PSMC. AKD Securities sees further momentum in share price performance as the auto sector enters a secular uptrend. AKD Securities revised target price of PkRI78/share offers upside of 22%. Buy!

I QCYI 3 result review: PSMC posted better than expected NPAT of PkR362mn (EPS: PkR4.40) in 1QCY13 with gross margins recorded at 4.7% vs. NLAT of PkR1 98mn (LPS: PkR2.41) in 40CY12 with gross margins of 1.3%. Tum around in sequential earnings is based on i) 27%Q0Q increase in volumes, ii) 2.3%QoQ increase in AUPs, iii) better than expected other income up 92%QoQ and iv) lower input costs due to falling JPY against PkR.

Higher gross margins: Recent quantitative easing measures taken by the Bank of Japan (B0J) have weakened the JPY against the US$, with the former depreciating by 14%CYTD against the greenback. As a result, the JPY has depreciated by 11 %CYTD vs. the PkR. In AKD Securities views, the impact of the weaker JPY is likely to materialize over the next few quarters where AKD Securities projects PSMCs gross margin to expand to 5.6% in CY13F vs. 4.0% in CY12. With the BoJ expected to maintain its aggressive easing across the next year or so, AKD Securities believe PSMC can continue to benefit even as its localization is at relatively high level of -60%.

Revival of auto financing: According to SBP data, auto financing has picked up to 4.6%Y0Y with sequential growth having clocked in over the last 8 consecutive quarters. With tighter auto import policies and higher price of available ii r ports, consumer preference is shifting to local cars again particularly as banks appear to be extending auto loans again, in the backdrop of tighter NIMs. PSMC can potentially take advantage of the uptick in auto sector dynamics through launch of another sub-1000cc variant, possibly in 2HCY1 3 in AKD Securities views.

Investment perspective: Trading at a CY1 3F PIE of 6.Ox, PSMCs valuations are still not stretched (this is at a 23% discount to the AKD Universe and also lower than the average normalized historical PIE of 7.8x for PSMC). In addition to one-off gain on sale of land, potential launch of new variants and continuation of taxi schemes can add to the underlying positives. AKD Securities revised target price of PkR1 78/share offers upside of 22%. Buy!

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