1QFY13A 2QFY13A 3QFY13A 4QFY13A 1QFY14A 2QFY14E 3QFY14E 1QFY13A 2QFY13A 3QFY13A 4QFY13A 1QFY14A 2QFY14A 3QFY14A May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Household Goods Overweight TGL PA Price Target: PKR55/Share Closing Price: PKR41.1/Share BUY Stock Statistics 12m Price Range (PKR) 47.9 19.2 Market Cap (PKR mn) 3,016.2 Outstanding Shares (mn) 73.5 Avg. Daily Volume mn (6m) 0.5 1Yr Relative Performance (%) TGL KSE-100 INDEX 270 220 170 120 70 TGL FY14E FY15E FY16E EPS (PKR) (0.5) 7.5 8.8 DPS (PKR) - - 2.8 PER NM 5.5 4.6 Div Yield 0% 0% 7% EV/EBITDA (x) 7.9 3.8 3.2 P/BV (x) 1.1 0.9 0.8 ROE -1% 18% 18% The Bell 6 May, 2014 Pakistan Research TGL: Investment case remains strong despite poor 3Q results 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 & 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 our 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: Our 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: We believe 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 our argument of the price setting position of TGL. In addition to this, our discussions with company management also indicate that TGL plans to increase float glass prices further in Jul-14. Revised estimates downwards: We have accounted for lower gas availability, high consumption of HSD and a 10% float glass price increase (in Mar-14) and revised our FY14 estimate to LPS of PKR0.45. We have also revised our FY15 EPS estimate downwards by 27% to PKR7.51. Reduced PT to PKR55/sh; Maintain Buy: We have reduced our 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. We believe that the company s strengthening position in the float glass market shall allow higher prices in the future which may substantially enhance current upside. We maintain BUY! Quarterly EPS trend PKR/share 4.00 3.00 2.00 1.00 0.00 0.74 0.53 0.91 2.81 0.89 0.31 Quarterly operating profit trend PKR Mn 200 150 100 50 0 74 53 79 44 108 167-1.00-50 -2.00-100 Syed Nasir Rizvi AC snarizvi@elixirsec.com (+92-21) 3569 4679-3.00-4.00 (3.29) -150-200 (163) Please refer to the last page for Analyst Certification and other important disclosures.
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 2 Key factors behind Fuel & 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 our expectation. We 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. We 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 Our 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. We estimate 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. We expect capacity utilization to improve to 75% in FY15.
FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY11A FY12A FY13A FY14E FY15E FY16E FY17E Strong market position shall likely allow higher prices going forward Pursuant to higher Fuel & Power costs and TGL s general strategy to rationalize prices (refer to our 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 our argument of the price setting position of the company in the float glass market. Furthermore, our discussions with company management also indicate that TGL plans to increase float glass prices further by ~10% in Jul-14. Revised estimates downwards We have accounted for lower-than-expected gas availability, high consumption of HSD and a 10% float glass price increase (in Mar-14) and revised our FY14 estimate to LPS of PKR0.45 (4QFY14E EPS: PKR1.63). We have also revised our FY15 EPS estimate downwards by 27% to PKR7.51. Annual EPS trend and expectation Annual gross margin trend and expectation PKR/share 12.00 10.00 8.00 6.00 4.00 1.96 2.00 0.00 3.98 5.00 (0.45) 7.51 8.85 9.79 22% 20% 18% 16% 14% 12% 10% 17.6% 20.5% 15.1% 10.9% 17.5% 17.5% 17.6% -2.00 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, we remain conservative and have not incorporated this in our estimates. We have conducted a sensitivity of FY15E EPS to a possible price increase in Jul-14. Every 5% increase in float glass price enhances our 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% Gas availability remains a key risk Glass manufacturing is an energy intensive business with profitability highly dependent on availability of gas. We have conducted a sensitivity of TGL s FY15E EPS to average gas availability across the year. Our base case assumes 50% gas availability during FY15. Every 3% reduction in gas supply reduces our 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% 3
Reduced PT to PKR55/sh; Maintain Buy We have reduced our 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. We believe that the company s price setting position may allow higher prices in the future which shall substantially enhance current upside. We maintain Buy! 4
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