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Daily Call REP- 300 March 9, 2018 Millat Tractors Limited Automobile Assemblers Ploughing the Future

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Daily Call REP- 300 March 9, 2018 Millat Tractors Limited Automobile Assemblers Ploughing the Future 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 [email protected] +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).
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