While TREET holds presence in various industries (Blades, Soap, Packaging & Bikes), it further plans to diversify into Battery and Health & Educational Services industry which is expected to support the com-pany in unlocking bottom-line growth. TREET shed 15% FYTD, underperforming the broader index by 8%. However, we highlight our liking for the scrip with a sum of the part valuation method Jun’16 TP of PkR85/sh where we believe the scrip is underplayed. Contributions in TP from the Blade, Packaging, Soap and Battery division stand at PkR55, PkR24.8, PkR2.4 and PkR2.7, respectively. Based on FY16E consolidated net earnings of ~PkR625.61mn (EPS: PkR4.54), the scrip trades at FY16E P/E of 13.6x and offers a potential upside of 38%.

In the pipeline: While the company continues to generate significant proportion of its top-line from the blades and

packaging segment (58% & 24%, respectively), TREET is looking forward to further diversify into various projects ranging from entrance in the Battery industry to building a Hospital and University.

Lead Acid Battery Plant: The Company entered the battery industry in 1QFY16, when it initiated the import of lead acid batteries. The particular segment contributed ~2% to the company’s top-line during 1QFY16, which as per our channel check, is anticipated to reach 8% by FY16 end. To further stretch its footing, TREET plans to install its own production line at Faisalabad, which we expect to come online from Mar’17. In this regard, the company has al-ready acquired 40 acres of land for its plant, where the total project cost is estimated to be PkR4.0bn with the an-nual capacity of 2mn batteries. Additionally, the Company has entered into an agreement with Daewoo Interna-tional Corporation to market its brand name in Pakistan for its batteries. While details pertaining to the new plant are not publically disclosed, we have only incorporated the contribution from the imported batteries. Based on an industry average net margin of 4% and segment’s 8% contribution to the top-line (i.e. ~23k units), sale of battery is sighted to contribute ~PkR24mn (EPS: PkR0.18) and PkR2.7/sh to bottom-line and indicative target price, respec-tively. Sensitivity of earnings and target price are shown in the table 1 & 2.

Hospital Business: In addition to making its way in the battery space, the company also plans to construct a General Hospital in Defence Area of Lahore. In the back drop, TREET is involved in discussions with the DHA Lahore for the land lease agreement, which is expected to be finalized within two months. With major details not available, we are not able to incorporate project’s numbers in our workings.

University of Culture and Arts: To set its footing in the educational service sector, the company intends to establish a Fine Arts University in Lahore (Raiwind Road) via a wholly owned subsidiary named Global Arts (Pvt.) Limited (previously TREET Services Limited). In this regard, TREET has already acquired 20 acres of land and initiated con-struction, where the institute is expected to commence its services within a year. Revenue stream of the project will be driven by 1) Rentals through part-lease of campus, 2) additional income from short term courses and diplo-mas and 3) Income from gym, club and other services. Based on the success of the university, the company further plans to establish schools in the near future.

Investment Perspective: TREET shed 15% FYTD, underperforming the broader index by 8%. However, we highlight our liking for the scrip with a Jun’16 TP of PkR85/sh primarily due to company’s diversification plan. We have used sum of parts valuation, where segment values have been determined on the basis of peers multiples. Starting with the Blades and Disposable razor division, we have used a discounted trailing PE multiple of Gillette Pakistan which after a discount of 40% turns out to 28.8x, resultantly contributing PkR55.0/sh to the TP. Furthermore, Packages (an associated com-pany) is taken as a measuring multiple for the packaging division, after adjusting a 40% discount it contributes PkR24.8/sh. For Soap Division, we have used Zulfiqar Industires Ltd. Trailing P/S multiple of 0.37, adding up another PkR2.4/sh . Whereas, for the battery division we have taken the average of EXIDE and ATBA trailing PE multiples, which turns out to contribute additional PkR2.7/sh to the TP. Based on FY16E consolidated net earnings of ~PkR625.61mn (EPS: PkR4.54), the scrip trades at FY16E P/E of 13.6x and offers a potential upside of 38%.

Please refer to the last page for Analyst Certification and other important disclosures.

Treet Corporation (TREET)

Venturing Different Businesses

Revenue

Contribution

Revenue

Contribution

3.0% 3.5% 4.0% 4.5% 5.0% 3.0% 3.5% 4.0% 4.5% 5.0%

6% 0.10 0.12 0.13 0.15 0.17 6% 1.52 1.77 2.03 2.28 2.53

8% 0.13 0.16 0.18 0.20 0.22 8% 2.03 2.36 2.70 3.04 3.38

10% 0.17 0.19 0.22 0.25 0.28 10% 2.53 2.95 3.38 3.80 4.22

12% 0.20 0.23 0.27 0.30 0.33 12% 3.04 3.55 4.05 4.56 5.07

14% 0.23 0.27 0.31 0.35 0.39 14% 3.55 4.14 4.73 5.32 5.91

Source: IFSL Research

Table 2 - Battery Segm ent ( Target Pri ce Sens i t i vi t i y)

Industry Avg. Net Margins

Table 1 - Battery Segm ent ( EPS Sens i t i vi ty)

Industry Avg. Net Margins

Source: IFSL Research

Pakistan Equity Research

December 16, 2015

IFSL Research Research.ifsl@investfinance.com.pk (021) 32276932-35 (Ext .268)

-15%

-10%

-5%

0%

5%

10%

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

KSE-100 TREET

Source: IFSL Research

Relative Price Performance

TREET BU Y

Market Price (PkR) 61.6

Indicative Target Price (PkR) 84.9

Potential Upside 38%

Outstanding Shares (mn) 137.8

Free Float (mn) 10.2

Market Cap (PkR mn) 8,484.3

Market Cap (USD mn) 81.2

3m High 65.5

3m Low 57.0

3m Average 61.7

3m Avg. Daily Turnover (mn shares) 0.9

Result Review: During 1QFY16, TREET posted consolidated net earnings of PkR159.5mn (Diluted EPS: PkR1.18), significantly up by 136%YoY versus PkR67.6mn (Diluted EPS: PkR0.50) in 1QFY15. While core operations remained subdued owing to depressed gross margins of the Blade / Razor and Packaging segment, other income arising from higher realized equity trading gains and interest income provided respite to the bottom-line. On the other hand, core fundamentals of major segment remained weak due to availability of cheaper smuggled blades and power disruption.

(PkR mn) 1QFY15 1QFY16 %

Stand Alone

Sales - net 1,757 1,938 10%

Gross Profit 391 387 -1%

Op. Profit 154 89 -42%

PBT 79 177 124%

Tax (11) (17) 54%

PAT 68 160 136%

EPS - Diluted 0.50 1.18 136%

Consolidated

Source: Company Reports & IFSL Research

INVEST AND FINANCE SECURITIES LIMITED .www.investfinance.com.pk

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