Equity Analysis /
Pakistan

Al Ghazi Tractors: Q2 CY 19 results: Stable qoq margins lead to better-than-expected earnings

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    23 August 2019

    Al-Ghazi Tractors Ltd (AGTL) reported Q2 CY 19 NPAT of PKR396mn (EPS: PKR6.84), down 45% yoy/30% qoq. This result was better than our projected EPS of PKR6.18, as gross margins stabilised sequentially. AGTL also announced its first interim dividend of PKR15/sh, which was again higher than our expected PKR10/sh, where AGTL was expected to reduce its short-term borrowings.

    AGTL sold 4,122 tractors during Apr-Jun'19, down 41% yoy/28% qoq, which majorly explains the earnings decline. Other takeaways from Q2 result include (i) slightly higher gross margins of 22.5%, up 0.3ppts over the previous quarter (on qoq basis, margins increased for the first time since Q1 CY 18) and (ii) finance charges of PKR97mn which were negligible during SPLY as company resorted to short term borrowings to support working capital.

    H1 CY 19 NPAT is down by a massive 48% yoy to PKR962mn (EPS: PKR16.60) due to both volume decline and margin compression. Tractor sales are down due to weak agricultural fundamentals while PKR depreciation pushed up raw material cost.

    Our TP of PKR391/sh for AGTL implies a Buy stance. While yoy decline in tractor sales may continue in the near-term, we highlight stability in margins is a positive, particularly in present high inflationary environment. AGTL trades at a CY 20f P/E of 7.8x (38% premium to 5.7x for KSE-100, but broadly in line with the last five-yeaer average premium of 53%) and a DY of 8% (assuming a 60% payout amid working capital concerns). However, our CY 20f DY rises to 11% if we assume 90% payout, taking cue from this result (1HCY19 payout is 90%).

    Risks: (i) Increase in taxes on tractors/parts, (ii) higher farm input prices, and (iii) damage to crops due to floods, pest attacks etc.