The Bell about TGL: Investment case remains strong despite poor 3Q results – Elixir Securities Limited

Karachi, May 06, 2014 (PPI-OT): Fuel and power costs battered bottom-line in 3Q: TGL announced its 3QFY14 results last week posting LPS of PKR3.29, against EPS of PKR0.91/sh during the same period last year. Operating results were significantly lower than expected because of low gas availability.

Key factors behind Fuel and Power cost hike: Although gas load-shedding in winters is an annual phenomenon, results in 3QFY14 remained lower than expected due to: 1) Actual gas received was lower than Elixir Securities Limited’s expectation and 2) TGL had to use HSD in its captive power plant (for float glass) due to unpredictable outages. Despite negative margins, the company opted not to stop production of float glass owing to its relatively new position in the market.

Better gas availability to improve results in upcoming quarters: Elixir Securities Limited’s discussions with company management indicate that gas availability has improved to ~50% in Apr-14 (against ~20% in 3QFY14) and is expected to improve further in the upcoming months due to summer season. This shall allow the company to significantly improve operating results in upcoming quarters.

Concerns regarding TGL’s market position should be alleviated: Elixir Securities Limited believes that concerns regarding TGL’s market leading status should be alleviated post 9MFY14 results. The company has posted robust sales growth of 110%, primarily brought about by entry into the new market.

Strong market position shall likely allow higher prices going forward: TGL increased float glass prices by ~10-12% at the end of March-14. This is in addition to the ~24% increase in Nov-14 and backs Elixir Securities Limited’s argument of the price setting position of TGL. In addition to this, Elixir Securities Limited’s discussions with company management also indicate that TGL plans to increase float glass prices further in Jul-14.

Revised estimates downwards: Elixir Securities Limited has accounted for lower gas availability, high consumption of HSD and a 10% float glass price increase (in Mar-14) and revised Elixir Securities Limited’s FY14 estimate to LPS of PKR0.45. Elixir Securities Limited has also revised Elixir Securities Limited’s FY15 EPS estimate downwards by 27% to PKR7.51.

Reduced PT to PKR55/sh; Maintain Buy: Elixir Securities Limited has reduced Elixir Securities Limited’s price target for TGL by 18% to PKR55/sh. The company is currently trading at an FY15 PER of 5.5x and offers potential upside of 35% at last closing. Elixir Securities Limited believes that the company’s strengthening position in the float glass market shall allow higher prices in the future which may substantially enhance current upside. Elixir Securities Limited maintains BUY!

Fuel and power costs battered bottom-line in 3Q

TGL announced its 3QFY14 results last week posting LPS of PKR3.29, against EPS of PKR0.91/sh during the same period last year. Operating results were significantly lower than expected, with the company posting gross loss of PKR62mn during the period because of low gas availability and use of expensive fuels including FO, HSD and LPG.


Key Financials Outstanding shares: 74m
(PKR mn) 3QFY13A 3QFY14A YoY (%) 9MFY13A 9MFY14A YoY (%)
Net Sales 930 2,049 120% 2,588 5,401 109%
Cost of Sales 777 2,110 172% 2,166 4,939 128%
Gross Profit 154 (62) NM 421 463 10%
Selling Expenses 57 78 37% 162 281 73%
Admin Expenses 17 24 37% 53 70 32%
Other Income 1 11 1594% 8 19 146%
Other Charges 4 (7) NM 12 0 -100%
Finance cost 12 80 546% 42 230 449%
Profit before tax 64 (225) NM 160 (99) NM
Taxation (4) 16 NM (1) 54 NM
Net Income 67 (241) NM 161 (153) NM
EPS (PKR) 0.91 (3.29) NM 2.19 (2.09) NM

Source: Elixir Research, Company Accounts

Key factors behind Fuel and Power cost hike

Although gas load-shedding in winters (concentrated in 3QFY14) is an annual phenomenon, results in 3QFY14 remained particularly appalling and lower than expected due to several reasons. Firstly, gas received was lower than Elixir Securities Limited’s expectation. Elixir Securities Limited had expected 40% gas availability during the quarter while actual availability was ~20%. Secondly, the company had to use HSD in its captive power plant (for float glass) throughout the quarter due to unpredictable power outages. Float glass production requires an undisrupted supply of electricity and due to unpredictable load shedding during the period, the company had to resort to use of HSD throughout the quarter. Elixir Securities Limited would like to point out that HSD is the most expensive fuel among those used by TGL with production cost estimated to be 4.5x that of gas. Despite negative margins, the company opted not to stop production of float glass owing to its relatively new position in the market.

Better gas availability to improve results in upcoming quarters

Elixir Securities Limited’s discussions with company management indicate that gas availability has improved to ~50% in Apr-14 (against average of 20% in 3QFY14 and 60% in 2QFY14) and is expected to improve further in the upcoming months due to summer season. Gas availability reaches a maximum of ~85% in the summer season. This shall allow the company to significantly improve operating results in upcoming quarters.

Concerns regarding TGL’s market position should be alleviated

Concerns regarding oversupply condition in the float glass market and TGL’s market leading status should be alleviated after recent results as robust growth in the company’s top-line is a clear indication of the company’s swift penetration into the new market. The company has posted sales growth of 1.1x YoY during 9MFY14, most of which has been brought about by entry into the float glass market. Elixir Securities Limited estimates that the company operated its float glass plant at ~65% capacity utilization during the period (~70% in 3QFY14), an exceptional feat given that its plant has only been online for ~12months. Elixir Securities Limited expects capacity utilization to improve to 75% in FY15.

Strong market position shall likely allow higher prices going forward

Pursuant to higher Fuel and Power costs and TGL’s general strategy to rationalize prices (refer to Elixir Securities Limited’s report: “TGL: A potential two-bagger” dated January 8, 2014), the company increased float glass prices by ~10-12% at the end of March-14. This is in addition to the ~24% increase in Nov-14 and backs Elixir Securities Limited’s argument of the price setting position of the company in the float glass market. Furthermore, Elixir Securities Limited’s discussions with company management also indicate that TGL plans to increase float glass prices further by ~10% in Jul-14.

Revised estimates downwards

Elixir Securities Limited has accounted for lower-than-expected gas availability, high consumption of HSD and a 10% float glass price increase (in Mar-14) and revised Elixir Securities Limited’s FY14 estimate to LPS of PKR0.45 (4QFY14E EPS: PKR1.63). Elixir Securities Limited has also revised Elixir Securities Limited’s FY15 EPS estimate downwards by 27% to PKR7.51.

But potential price increase may provide strong upside

Even though the company has indicated that it plans on increasing float glass prices by 10% in Jul-14, Elixir Securities Limited remains conservative and have not incorporated this in Elixir Securities Limited’s estimates. Elixir Securities Limited has conducted a sensitivity of FY15E EPS to a possible price increase in Jul-14. Every 5% increase in float glass price enhances Elixir Securities Limited’s EPS estimate by 22%.


Potential float glass price increase in Jul-14 0% 5% 10%
FY15E EPS (PKR) 7.5 9.2 10.8
Impact (%) 0% 22% 44%

Source: Elixir Research

Gas availability remains a key risk

Glass manufacturing is an energy intensive business with profitability highly dependent on availability of gas. Elixir Securities Limited has conducted a sensitivity of TGL’s FY15E EPS to average gas availability across the year. Elixir Securities Limited’s base case assumes 50% gas availability during FY15. Every 3% reduction in gas supply reduces Elixir Securities Limited’s earnings estimate by 11%.


Gas Availability (%) 38% 41% 44% 47% 50% 53% 56% 59% 62%
FY15E EPS (PKR) 4.1 5.0 5.8 6.7 7.5 8.4 9.2 10.1 10.9
Impact (%) -45% -34% -23% -11% 0% 11% 23% 34% 45%

Reduced PT to PKR55/sh; Maintain Buy

Elixir Securities Limited has reduced Elixir Securities Limited’s price target for TGL by 18% to PKR55/sh. The company is currently trading at an FY15 PER of 5.5x and offers potential upside of 35% at last closing. Elixir Securities Limited believes that the company’s price setting position may allow higher prices in the future which shall substantially enhance current upside. Elixir Securities Limited maintains Buy!

The post The Bell about TGL: Investment case remains strong despite poor 3Q results – Elixir Securities Limited appeared first on Business News Pakistan.

The post The Bell about TGL: Investment case remains strong despite poor 3Q results – Elixir Securities Limited appeared first on AsiaNet-Pakistan.

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