Equity Analysis /

Pakistan Suzuki: Q2 results – loss below expectations, but operating results still weak

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    24 July 2019

    PSMC reported Q2 CY 19 loss of PKR545mn (LPS: PKR6.62), vs a loss of PKR981mn (LPS: PKR11.92) in Q1 CY 19. LPS came in lower than our expectations of PKR13.67 as the company recorded a tax reversal of PKR1,053mn, while we had incorporated a tax charge on a turnover basis. H1 CY 19 LPAT stands at PKR1,525mn (LPS: PKR18.53), versus H1 CY 18 profit of PKR1,298mn (EPS: PKR15.77).

    Key highlights: (i) Gross margins fell to their lowest since Q2 CY 12 at 1.0% due to PKR depreciation, (ii) distribution expenses jumped to PKR1,001mn, up by 56% yoy, possibly due to the launch of its new model Suzuki Alto, and (iii) finance cost of PKR380mn vs PKR20mn as the company resorted to short-term borrowing (customer advances have declined). Loss before tax amplified by c3x qoq to PKR1,597mn.

    According to management, tax reversal emanated from the realisation of deferred tax asset. PSMC has been booking turnover tax since Q3 CY 18 (which have a carry forward period of five years) and it appears that the company is expecting a higher profitability in H2 CY 19, in our view. Profits in H2 may come from sharp price increases in Jul’19 (15%-20%) and bumper sales of Alto.

    We recommend Sell on PSMC with Dec’19 TP of PKR160/sh. Major concerns for the company are (i) a tougher turnover tax regime, which will require a high margin profile, and (ii) model launches by new OEMs in the Economy segment.