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January 8, 2014
Initiation Pakistan Research
Please refer to the last page for Analyst Certification and other important disclosures.
Tariq Glass Industries Ltd. (TGL) has managed to become a leader in the float glass market
within six months of inaugurating its new 181ktpa plant. The company previously operated
only in the container glass and tableware segment. Despite predatory pricing by Ghani Glass
(GHGL) to limit TGLs market penetration, TGL, helped by its superior quality, has
successfully captured ~50% of float glass market share. The current market standing is now
apparently well accepted and respected by these two players and resultantly both increased
float glass prices by 24% in Nov-13. The current increase has merely recouped cuts post
TGL's COD and inflationary impact of price freeze during the preceding two years is yet to be
passed on. Recent price increase coupled with volumetric growth from an expanding
product portfolio is likely to bring about strong earnings growth for TGL. We expect FY14
and FY15 EPS to clock in at PKR7.95 and PKR10.80, up 50% and 36% YoY. TGL is currently
trading at a cheap FY14/FY15 PER of 3.7x/2.7x. Our Dec-14 PT of PKR67/sh offers a stellar
upside potential of 127%. BUY!
Better quality allowed market penetration: Industry sources establish that Tariq Float has
generally been accepted by market participants as being of better quality than GHGLs float
glass. This has allowed TGL to aggressively expand its market share post-expansion.
End of predatory pricing to benefit TGL: Owing to the high market penetration accomplished
by TGL in a very short time span, GHGL ended the price war and apparently accepted TGL's
market share. Resultantly, both companies collectively increased prices by 24% in Nov-13.
This, coupled with a recent 7% increase in tableware prices, shall allow strong margin
expansion during 2HFY14. We expect TGL's gross margins to rise to 22.7% in 4QFY13 from
14.9% in 1Q, which would still be 6pp lower than pre-predatory pricing gross margins of GHGL.
Expanding product portfolio and focus on exports to improve utilization: TGL recently started
producing colored-float glass and is also planning on commencing production of CVD coated
reflective glass and mirror glass. In addition to this, TGL is also focusing on exporting its surplus
production to India and Middle East. We expect that TGL shall achieve capacity utilization of
75% in the float segment by 4QFY14 and have assumed the same as peak utilization level.
TGL Financial Highlights
FY11A FY12A FY13A FY14E FY15E FY16E
EPS 2.07 4.22 5.30 7.95 10.80 11.79
DPS (PKR) 1.00 - - - 5.00 6.00
BV/share 23.8 29.3 36.4 44.4 55.2 62.0
PER (x) 14.3 7.0 5.6 3.7 2.7 2.5
Dividend Yield 3% 0% 0% 0% 17% 20%
PBR (x) 1.2 1.01 0.81 0.67 0.54 0.48
EV/EBITDA 4.8 4.8 10.5 3.4 2.2 1.8
ROA 8% 9% 7% 8% 11% 12%
ROE 13% 16% 16% 20% 22% 20%
EBITDA growth 4% 51% -17% 196% 33% 4%
Net Profit growth 1% 104% 26% 50% 36% 9%
Source: Elixir Research
Household Goods TGL: A potential two-bagger
TGL PA BUY Price Target: PKR67/Share
Closing Price: PKR29.6/Share
Key Data
12m Price Range (PKR) 29.6 17.0
Market Cap (PKR mn) 2,049.9
Outstanding Shares (mn) 69.3
Avg. Daily Volume mn (6m) 0.4
1Yr Relative Performance
Source: Elixir Research
Syed Nasir RizviAC
snarizvi@elixirsec.com (+92-21) 3569 4679
60
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140
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180
Jan
-13
Mar
-13
May
-13
Jul-
13
Sep
-13
Nov
-13
Jan
-14
(%) TGL KSE-100 INDEX
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Initiation TGL
2 Elixir Securities January 8, 2014
Initiate with BUY
TGL is currently trading at a cheap FY14/15 PER of 3.7/2.7x. We have valued TGL using FCFE
and have used cost of equity of 17% with a terminal growth rate of 3%. Our Dec-14 Price
Target of PKR67/sh offers stellar potential upside of 127%. Strong gains expected from
volumetric growth coupled with end of predatory pricing make TGL a compelling investment
opportunity. BUY!!
TGL Valuation
PKR Mn
FY15E FY16E FY17E FY18E FY19E FY20E
Assumptions: Risk Free Rate 10.0%
Risk Premium 7.0% Cost of Equity 17.0% Terminal Growth 3.0%
FCFE
9 336 491 663 732 963
Discount Factor
0.5 1.5 2.5 3.5 4.5 5.5
Discounted FCFE
8 266 331 383 361 406
PV of FCFE 1,755 PV of Term. Value 2,987 Cash Balance 193 Dec-14 Equity Value 4,936 No. of Shares (Mn) 73* Dec-14 Price Target 67 Source: Elixir Research
* Adjusted for potential dilution
Tariq Glass is engaged in the production of glass products
Tariq Glass Industries Ltd. is engaged in the production and sale of glass products including
glass containers, tableware and float glass with annual combined production capacity of
~280ktons per annum. Its production facility is situated in the outskirts of Lahore. The
company markets its products under the Toyo Nasic, Omroc, Nova and Tariq Float
brand names.
TGL recently commissioned its float glass plant
In 2010, TGL decided to enter the float glass market by investing in a 550tpd
(181ktons/annum) float glass plant. Total capital expenditure for this project amounted to
PKR3.5bn and was financed by a combination of debt and equity. The company issued 46.2mn
right shares for this purpose in FY11. The plant was commissioned during 4QFY13 and the
company is marketing its float glass under the Tariq Float brand name.
GHGL is the primary competitor in the float glass market
According to industry sources, annual demand for float glass in Pakistan is estimated to be
around 250ktons per annum. Prior to TGLs entry into the float glass market, there was a
shortage of locally produced float glass. Ghani Glass Ltd. (GHGL) was the primary producer and
market leader with surplus demand being fulfilled by imported products. GHGL enjoyed
healthy margins on the product due to lack of competition coupled with high prices of
imported glass. Owing to flourishing demand, GHGL expanded its production facility from
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Initiation TGL
3 Elixir Securities January 8, 2014
~110ktons to ~293ktons in FY12. This, combined with TGLs recent entry into the market, has
now a created a slight oversupply of float glass in the country.
Predatory pricing reduced margins
Despite cost pressures, GHGL had not increased prices of float glass since FY12 in anticipation
of TGLs entry into the market. In fact, after TGLs float glass plant came online in 4QFY13,
GHGL employed a predatory pricing strategy to limit TGLs market penetration and further
reduced its ex-factory prices from ~PKR45/kg to ~PKR34/kg. TGL, being a new entrant and
price taker, had to price its product at the reduced rate in order to gain access to the market.
Lower prices combined with higher depreciation and finance costs resulted in lower margins
and earnings for TGL. TGL posted gross margin of 13.9% between 4QFY13-1QFY14, down 5.7pp
relative to 19.6% during the same period last year (when the float glass plant had not been
commissioned).
0
50
100
150
200
250
300
350
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
Float Capacity Float ProductionKTonsKTons
GHGL Float glass capacity and production trend
Source: Company Accounts, Elixir Research
30.5%
28.7% 28.6% 28.8%
22.9% 22.5%
15%
17%
19%
21%
23%
25%
27%
29%
31%
33%
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
GHGL Gross Margins
GHGL enjoyed healthy margins prior to FY12
Source: Company Accounts, Elixir Research
29,595
34,591
42,641 44,254
39,404
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
Average Ex. Factory Float Glass PricesPKR/ton
GHGL reduced float glass prices in 4QFY13
Source: Company Accounts, Elixir Research
10.2%9.0%
19.3%17.6%
20.47%
15.1% 14.9%
0%
5%
10%
15%
20%
25%
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
1Q
FY1
4
TGL Gross Margins
TGLs realized gross margins plunged after float glass expansion
Source: Company Accounts, Elixir Research
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Initiation TGL
4 Elixir Securities January 8, 2014
Better quality allowed market penetration
Company and industry sources establish that Tariq Float has generally been accepted by
market participants as being of better quality than GHGLs float glass. Some sources also
indicate that TGLs product is comparable, if not better, than the much higher priced imported
glass, which is priced around PKR85/kg. This, coupled with rigorous marketing efforts, has
allowed TGL to aggressively expand its market presence after commencing production.
Company sources indicate that TGL has already captured ~50% of the float glass market from
GHGL and imported products and has successfully solidified its position as a key player in the
industry.
Price war has ended now
Owing to the high market penetration accomplished by TGL in a very short time span, GHGL
has apparently acknowledged TGLs strong position in the float glass market and ended the
price war. The two companies collectively increased prices by 24% to PKR42/kg in Nov-13. The
current price increase has merely recouped cuts post TGL's COD and inflationary impact of
price freeze during the preceding two years is yet to be passed on.
Expanding product portfolio and focus on exports to allow volumetric growth
After successful penetration in the float glass market, TGL has started producing and selling
colored-float glass during 2QFY14 which is a higher value product and is priced at ~PKR60/ton.
The company is also planning on commencing production of CVD (Chemical Vapor Deposition)
coated reflective glass and mirror glass which are higher-priced variants of float glass.
Successful marketing of these products shall allow TGL to gain an even higher share of the
market in Pakistan. In addition to this, the company is also focusing on exporting its surplus
production to neighboring regions such as India and the Middle East. We expect TGL to
achieve optimum capacity utilization of 75% in the float segment by 4QFY14 and
conservatively assume that capacity utilization shall continue at the same level post-FY14.
Note that float glass plants can technically achieve 80% utilization levels.
Tableware prices have also been increased
TGL holds a strong reputation in its tableware business and produces a wide variety of
products including glass cups, mugs, goblets and ashtrays. The company operates at close to
optimum capacity in this segment (FY13 utilization: 71%) and has little room for volumetric
growth. Margins on these products had remained relatively stable during the last three years
hovering between 18-20%. However, increased costs during FY13 were not entirely passed on
by the company resulting in lower margins (9MFY13: 16%). TGL has recently increased
tableware prices by 7% in Dec-13 to pass on the increased costs during the year.
Expect strong earnings ramp-up in the remaining part of FY14
Increase in both float glass and tableware prices coupled with volumetric growth on the back
of an expanding product portfolio shall allow strong earnings growth for TGL in the remaining
part of the current fiscal year. We expect EPS to clock in at PKR1.18, PKR2.69 and PKR3.14
during 2Q, 3Q and 4QFY13, up 1.1x, 1.8x and 5% YoY. This shall take FY14 EPS to PKR7.95, up
50% YoY. In addition to this, we believe that gross margins shall come in at 16.1%, 21.4% and
22.7% during the three quarters. Margins shall post strong recovery in the second half of FY14
due to better gas availability post-winter and realization of the full impact of the price
increase.
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Initiation TGL
5 Elixir Securities January 8, 2014
Growth to continue post-FY14
We expect FY15 EPS to clock in at PKR10.8, up 36% YoY, on the back of better margins and
capacity utilization relative to FY14 average due to full year impact of higher prices new glass
variants. In addition to this, bottom-line shall also be supported by debt repayments and lower
finance costs in FY15. Subsequent to FY15 we expect earnings growth to materialize and post a
modest 5-year CAGR of 7% between FY16-FY20.
15.1%
19.1%
22.2% 22.0% 22.0% 21.9%
10%
12%
14%
16%
18%
20%
22%
24%
FY1
3A
FY1
4E
FY1
5E
FY1
6E
FY1
7E
FY1
8E
TGL Gross Margins
Expect better margins in the near future
Source: Company Accounts, Elixir Research
0
50
100
150
200
250
300
FY1
3A
FY1
4E
FY1
5E
FY1
6E
FY1
7E
FY1
8E
TGL Capacity TGL ProductionKTonsKTons
Capacity utilization to improve in FY14 and FY15 In FY14
Source: Company Accounts, Elixir Research
17.5%
14.8%
16.5%
12.8%
14.9%16.1%
21.4%22.7%
10%
12%
14%
16%
18%
20%
22%
24%
1Q
FY1
3A
2Q
FY1
3A
3Q
FY1
3A
4Q
FY1
3A
1Q
FY1
4A
2Q
FY1
4E
3Q
FY1
4E
4Q
FY1
4E
TGL Gross Margin
Gross margins shall also improve
Source: Company Accounts, Elixir Research
0.79 0.57
0.97
2.98
0.94 1.18
2.69
3.14
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
1Q
FY1
3A
2Q
FY1
3A
3Q
FY1
3A
4Q
FY1
3A
1Q
FY1
4A
2Q
FY1
4E
3Q
FY1
4E
4Q
FY1
4E
PKR/share
Expect better earnings in the upcoming quarters
Source: Company Accounts, Elixir Research *Tax reversal realized during 4QFY13
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Initiation TGL
6 Elixir Securities January 8, 2014
PT adjusted for dilution from share issue
TGL currently owes USD2mn to Qinhuangdao Yaohua Glass Machine Manufacture Co. Ltd. for
supply of equipment for its float glass plant. The company has an option to issue 4.2mn fully
paid ordinary shares to the supplier against these dues. It has already taken shareholder
approval in this regard and is awaiting regulatory approvals. We believe that TGL shall manage
to issue the shares by the end of 2014 and have accordingly adjusted our PT for this potential
dilution.
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Initiation TGL
7 Elixir Securities January 8, 2014
Financials
Income Statement
PKRmn FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E
Net Sales 2,071 2,602 3,411 3,889 7,329 8,539 9,021 9,529 10,066
COGS 1,672 2,145 2,713 3,302 5,928 6,642 7,036 7,437 7,863
Gross Profit 399 457 698 587 1,400 1,897 1,985 2,092 2,203
Operating costs 46 91 145 128 41 94 116 140 166
EBITDA 354 366 554 459 1,359 1,803 1,869 1,952 2,037
EBIT 247 251 434 250 903 1,328 1,375 1,439 1,502
Finance Cost 45 42 41 94 205 166 107 99 65
Net Profit Reported 188 210 423 153 688 1,151 1,257 1,327 1,424
EPS (PKR) 2.05 2.07 4.22 5.30 7.95 10.80 11.79 12.45 13.36
DPS (PKR) 0.58 1.00 - - - 5.00 6.00 6.25 6.75
Source: Elixir Research
Balance Sheet
PKRmn FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E
Shareholders Funds 618 1,647 2,033 2,524 3,075 3,823 4,294 4,740 5,233
Long Term Loans 315 218 859 2,061 1,755 1,459 1,164 869 574
Current Liabilities 431 478 939 1,776 2,010 1,718 1,577 1,538 1,602
Capital & Liabilities 1,365 2,342 3,831 6,361 6,840 7,001 7,035 7,147 7,408
Net Fixed Assets 910 1,389 2,814 4,537 4,465 4,398 4,320 4,231 4,129
Current Assets 455 953 1,017 1,824 2,375 2,603 2,715 2,916 3,279
Total Assets 1,365 2,342 3,831 6,361 6,840 7,001 7,035 7,147 7,408
Source: Elixir Research
Cash Flow Statement
PKRmn FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E
Net Income 142 144 293 367 551 748 817 863 926
Depreciation 106 115 119 209 457 475 494 514 534
Capex 201 590 1,525 1,878 400 408 416 424 433
Work. Cap. Changes 76 42 36 (909) (413) (111) (63) (66) (69)
FCFF 185 680 (811) (2,056) 332 812 901 951 1,000
Net Debt Repayments 133 181 (775) (1,853) 195 695 495 395 295
FCFE 22 472 (62) (264) 4 9 336 491 663
Dividends 17 23 69 0 0 0 347 416 433
Net Cash Flows 5 449 (132) (264) 4 9 (10) 75 230
Source: Elixir Research
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Initiation TGL
8 Elixir Securities January 8, 2014
Financial Ratios
FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E
EPS 2.05 2.07 4.22 5.30 7.95 10.80 11.79 12.45 13.36
DPS 0.58 1.00 - - - 5.00 6.00 6.25 6.75
BVPS 8.9 23.8 29.3 36.4 44.4 55.2 62.0 68.4 75.5
PER 14.5 14.3 7.0 5.6 3.7 2.7 2.5 2.4 2.2
EV/EBITDA 6.8 4.8 4.8 10.5 3.4 2.2 1.8 1.5 1.2
P/BV 3.3 1.2 1.0 0.8 0.7 0.5 0.5 0.4 0.4
Div Yield 2% 3% 0% 0% 0% 17% 20% 21% 23%
ROCE 15% 11% 12% 9% 10% 13% 14% 15% 16%
ROA 11% 8% 9% 7% 8% 11% 12% 12% 13%
ROE 25% 13% 16% 16% 20% 22% 20% 19% 19%
Gearing 0.55 (0.17) 0.31 1.09 0.83 0.48 0.32 0.19 0.07
Turnover Growth 47% 26% 31% 14% 88% 17% 6% 6% 6%
EBITDA Growth 212% 4% 51% -17% 196% 33% 4% 4% 4%
Net Profit Growth NM 1% 104% 26% 50% 36% 9% 6% 7%
Source: Elixir Research
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Initiation TGL
9 Elixir Securities January 8, 2014
Chief Executive Officer
Junaid Iqbal (92-21) 3569 4617 jiqbal@elixirsec.com
Pakistan Research Team Institutional Equities Retail Equities
Azfer Naseem, CFA
Head of Research (92-21) 3569 4716 anaseem@elixirsec.com
Sateesh Balani (92-21) 3569 4679 sbalani@elixirsec.com
Faisal Bilwani
Head of Equities - FII (92-21) 3569 3919 fbilwani@elixirsec.com
M. Sibtain Mustafa
Head of Equities - LII (92-21) 3569 3911 smustafa@elixirsec.com
Muhammad Ali Taufiq
Head of Equity Strategy Retail (92-21) 3569 3922 alitaufiq@elixirsec.com
Sikandar Rahim (92-21) 3569 3914 srahim@elixirsec.com
Ujala Adnan (92-21) 35694622 Uadnan@elixirsec.com
Jawwad Aboobakar (92-21) 3565 3182 jawwad@elixirsec.com
Kamran Kaludi (92-21) 3569 3920 kkaludi@elixirsec.com
Mubashir Anis Silat (92-21) 3569 4622 manis@elixirsec.com
Muhammad Raza Rawjani (92-21) 3569 3911 rrawjani@elixirsec.com
Adil Abid (92-21) 3569 4666 aabid@elixirsec.com
Syed Nasir Rizvi (92-21) 3569 4622 snarizvi@elixirsec.com
HNW & Family Offices
Harris Ahmed Batla (92-21) 3569 4706 habatla@elixirsec.com
Khurram Malik (92-21) 3569 4602 kmalik@elixirsec.com
Ibad-ur-Rehman (92-21) 3569 4622 irehman@elixirsec.com
Lahore Office Tahir Maqbool (92-42) 3577 2643 tmaqbool@elixirsec.com
Islamabad Office Asim Ghafoor Qureshi (92-51) 227 2341 aghafoor@elixirsec.com
Syed Tahseen (92-21) 3569 4622 tjaved@elixirsec.com
Faisalabad Office Syed Baqar Hassan (92-41) 254 1001-4 sbhassan@elixirsec.com
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Initiation TGL
10 Elixir Securities January 8, 2014
Analyst Certification
The Elixir Research Team certifies that (1) the views expressed in this report accurately reflect their personal views about all of the subject companies/securities and (2) no part of their compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.
Copyright 2014, Elixir Securities Pakistan (Pvt.) Ltd. All rights reserved. This report or any portion hereof may not be reproduced, distributed, published or sent to a third party without prior consent of Elixir Securities Pakistan (Pvt.) Ltd.
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