Daily Call REP- 300 March 9, 2018 Millat Tractors Limited Automobile Assemblers Ploughing the Future
1
BUY MTL: Target Price revised upward by 9.1% to PKR 1,604/share We revise upwards our DCF-based Dec’18 TP of Millat Tractors Limited to PKR Target Price 1,604.4 1,604/share (earlier 1,470/share). Our review thesis is hinged upon i) Higher than Last Closing 1,375.1 expected volumetric growth convinced us to review our volumetric assumption to 39,015 Upside (%) 16.7 units including exports units (previous assumption was 37,635 units), ii) Increase in 1-2% PSX Code MTL of selling prices of all the variants from Dec’17, iii) Low dependency on imported raw Bloomberg Code MTL PA material which allows gross margins to remain firm; currently localization level is between
Shares 85% to 90% depending on different variants, and iv) We expect the budget to be farmer focused, agriculture and rural oriented which will allow the company to continue growth at Market Cap (USD m) 554 the same pace. Based on our thesis, a 17% upside potential is available based on the Outstanding Shares (m) 44.3 scrip’s last closing and we recommend a “BUY”. Currently the stock is trading at a FY18E Free Float (%) 50.0 PE multiple of 12.2x. 12M Avg. Daily Turnover (m) 0.1
12M High | Low (PKR) 1,475.8 | 1,019.9 Exhibit: Old & New Estimates Major Shareholders Directors FY18E FY19F FY20F Dec-18 Old 1,470 Key Matrics Target Price New 1,604 FY17A FY18E FY19F (PKR/Share) Change 9.12% Total Equity (PKRbn) 5.7 5.9 5.9 Old 98.6 87.2 98.2 Total Assets (PKRbn) 17.1 17.8 17.5 PAT (PKR bn) 4.3 5.0 4.2 EPS (PKR) New 112.3 95.6 107.5 EPS (PKR) 96.1 112.3 95.6 Change 13.86% 9.61% 9.46% P/E (x) 14.3 12.2 14.39 Old 95.00 85.00 95.00 P/B (x) 10.6 10.4 10.36 DPS (PKR) New 110.00 95.00 105.00 DPS (PKR) 95.0 110.0 95.00 Change 15.79% 11.76% 10.53% Div Yield (%) 7% 8% 7% Source: AHL Research ROE 86% 86% 72% Noticeable Volumetric Growth With MTL investing in innovation and complying with environmental friendly requirements Stock Performance (the company launched export quality emission compliant Diesel engines MF 300 series 130% MTL KSE100 in collaboration with Stanadyne Corporation USA and further added EURO-II technology 120% in tractors), export competitiveness of tractors has increased. During 1HFY18, the industry recorded strong volumetric growth of 54% YoY to 32,289 units compared to 20,933 units 110% in SPLY while, the company has been able to maintain its market share at 62% during 100% 1HFY18 (62% in 1HFY17). The growth in sales is attributable to higher crop production
90% (sugar, cotton and wheat), better yields on the back of improved water availability to land (strong monsoon season), subsidy to farmers on purchase of tractors by government, 80% easy availability of credit to farmers and use of tractors in non-agricultural sectors. A 70% similar pace of growth could lead to higher orders in the future as MTL currently has pre-
booked orders and delivery time is in excess of 3-4 months. This is clearly evident from
Jul-17
Apr-17 Oct-17
Jan-18 Jun-17
Mar-17 Mar-18
Feb-18
Dec-17 Nov-17
Aug-17 Sep-17 May-17 all time high advances from customers, which stand at PKR 10.8bn translating into 12,045 units (assuming average selling price of PKR 900,000). Source: Bloomberg
Analyst
Arsalan Hanif
+92-21-32462589
www.arifhabibltd.com
1 www.jamapunji.pk Daily Call March 9, 2018
Share Holding Pattern Exhibit: Market Share over the years 12.5% 1.7% 4.6% 8.9% Associated co.'s (PKR mn) Production Sales Market Share (RHS) Public co.'s 50,000 64% 29.7% Insurance co.'s 63% 42.6% 40,000 Directors 63% 30,000 Individuals 62% Others 20,000 62% 61% 10,000 Source: Company Financials, AHL Research 61%
- 60%
FY14 FY15 FY16 FY17 FY18E Source: Company Financials, AHL Research
Exhibit: Advances from customers Advances from Customers (PKR mn) Units Booked 14,000 12,045 12,000 10,841 10,429 10,000 9,386
8,000
6,000 3,646 4,051 4,000
2,000 974 1,082 1,109 1,232
- FY14 FY15 FY16 FY17 1HFY18
Source: Company Financials, AHL Research
No Expansion Plan in Pipeline As per the management, they expect tractors demand will not grow at a similar pace as we witnessed in last two years due to sugarcane crisis whereby farmers produce has not been uplifted. Consequently, the company does not plan to expand. As far as parts availability is concern, there are no constraints as parts suppliers have enough capacity to meet excess requirements.
Stable Margins Owing To High Localization The current localization level is between 85-90% while reliance on imports is just 10-15% depending on variants. Meanwhile, Millat tractors is engaged in manufacturing of engines and agricultural tools (combined harvesters, balers and feed mixtures) along with the company’s investment in parts manufacturing companies like Millat Equipment Limited, Millat Industrial Products Limited, Bolan Casting Limited and Tipeg Intertrade DMCC. These companies are involved in manufacturing batteries, cells, automotive parts, agriculture components and heavy machinery for tractors and castings.
www.arifhabibltd.com
2
Daily Call March 9, 2018 Cheapest Tractors in the Region Joint Venture in Hyundai Nishat Motors Pakistan is privileged due to its capability of manufacturing core parts of tractors or being manufactured by some locally operated companies. If compare local tractor prices with neighboring countries like India and Bangladesh, we observe that our locally manufactured Millat Tractors, tractors are the cheapest in the sub-continent region. 18%
NML, 42% Exhibit: Tractor Price Comparison Company Model Horse Power Price in PKR Price in USD Pakistan Sojitz International, Massey Ferguson MF-240 50 738,150 6,710 40% Massey Ferguson MF-350 50 756,525 6,878 India Mahindra Yuvo 475 DI 45 862,069 7,837 Bangladesh Source: Company Financials, AHL Research Sonalika DI 50 Rx 50 1,573,333 14,303 Source: AHL Research
Investment in Joint Venture with Hyundai Nishat Motors After having core expertise in manufacturing tractors, MTL management further announced in its recent result to diversify from tractors business to passenger car manufacturing business (HNMPL is setting up green field project for assembly and sale of Hyundai passenger and 1 ton range commercial vehicles in Pakistan), a consortium led by Nishat group to manufacture Hyundai cars. MTL holds an 18% stake in the venture by acquiring 153mn shares in Hyundai Nishat Motors Private Limited (HNMPL) at a cost of PKR 1.53bn. We expect this to act as a key catalyst for the scrip going forward.
Capacity Utilization The company has a normal production capacity of 30,000 tractors per annum on double shift basis while excess production can only be achieved by working overtime and triple shift basis to increase production capacity to 45,000 units (previously 42,188 units produced in FY11). MTL’s capacity utilization by the end of the year is expected to settle at 130% compared to 113% in FY17. We believe the company is making the most of the ongoing demand cycle emanating from CPEC related construction activities, infrastructure development and increase in agricultural land.
Exhibit: Capacity Utilization Level
(PKR mn) Capacity Production Utilization 50,000 135% 125% 40,000 115% 105% 30,000 95% 85% 20,000 75% 10,000 65% 55%
- 45%
FY14 FY15 FY16 FY17 FY18E Source: Company Financials, AHL Research
www.arifhabibltd.com
3
Daily Call March 9, 2018
Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is offering. Analyst(s) are not subject to the supervision or control of any employee of AHL’s non-research departments, and no personal engaged in providing non-research services have any influence or control over the compensatory evaluation of the Analyst(s). Equity Research Ratings Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2018. In addition, return excludes all type of taxes. For more details kindly refer the following table;
Rating Description BUY Upside* of subject security(ies) is more than +10% from last closing of market price(s) HOLD Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s) SELL Upside* of subject security(ies) is less than -10% from last closing of market price(s) * Upside for Power Generation Companies (Ex. KEL) is upside plus dividend yield.
Equity Valuation Methodology AHL Research uses the following valuation technique(s) to arrive at the period end target prices; Discounted Cash Flow (DCF) Dividend Discount Model (DDM) Sum of the Parts (SoTP) Justified Price to Book (JPTB) Reserved Base Valuation (RBV)
Risks The following risks may potentially impact our valuations of subject security (ies); Market risk Interest Rate Risk Exchange Rate (Currency) Risk
Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report.
4
Daily Call March 9, 2018 For U.S. persons only: This research report is a product of Arif Habib Limited (“Arif Habib”), which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
This report is intended for distribution by Arif Habib Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Arif Habib Limited has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.
5