Q1 20 earnings declined by c9% yoy. Despite c12% yoy growth in revenue, Singer’s earnings declined by c9% due to 194bps yoy dent in gross margin. NPAT stood BDT111mn (EPS BDT1.11) in Q1 20 against BDT123mn (EPS BDT1.23) in Q1 19. We think competitive pricing and loss of sales for six days due to Covid-19 holiday resulted in the margin dent. Please note that Bangladesh entered into a countrywide lockdown in the form of a general holiday from the 26th March. The holiday has already been extended four times (until 16th May) and may be extended further depending on the pandemic scenario. All retail stores (except those for foods and drugs) are closed till now which included six days in Q1 20.
We trim our TP from BDT209 to BDT145 (ETR 1.7%) and maintain a Hold. It implies a downward TP revision by c31% as we revised assumptions. Our valuation implies 30.8x 2020f PE, 1.6x 2020f EV/Sales, and 12.6x 2020f EV/EBITDA. However, we note that the 2020f figures are unusual ones and the business is likely to improve from 2021. Based on the 2021 expectations, our valuation implies 16.2x 2021f PE, 1.1x 2021f EV/Sales, and 8.3x 2021f EV/EBITDA. After the dent and the subsequent recovery, we expect Singer to generate c20% sales and c23% earnings CAGR during 2022-2025 period.
No new manufacturing facility; any cost optimization to be passed on to the consumer. After the acquisition by Arçelik, the leading home appliance product manufacturer in the EMEA region, we expected that Singer will further expand its manufacturing facility to benefit from Arçelik’s tech know-how. However, any expansion initiative seems unlikely now as the acquirer plans to understand Bangladesh’s market dynamics first and then act accordingly. Meanwhile, the improvement in cost efficiency (c5% decline in costs under normal scenario) due to the synergy will be passed on to the customers to capture more market share.
Singer is likely to cut operating expenses in 2020. We expect Singer to cut down its advertising and other discretionary expenses to partially offset the dent in sales. However, we expect an increase in bad debt provisioning as more customers are likely to default due to loss in purchase power. Also, the delay in hire purchase instalment payment may suggest that the working capital requirement could remain higher compared to the level of sales.
Keep an eye on Singer and wait until the repercussion of the pandemic is over. Bangladesh remains an under-penetrated market for consumer durable products. The penetration rates of such products are very low in the country – 2% for washing machines, 3% for air conditioners, and 20% for refrigerators. With the low penetration rate, our long term investment theme for Singer remains the same. Though we assume a 55% earnings decline in 2020, we also expect a subsequent recovery in 2021-22 (sales increasing towards 2019 level), and high growth period (20%+) in 2022 and 2023 as the economy revives.
Risks to our target price and recommendation. We assume that the dent in sales in 2020 will be followed by a recovery in 2021 as we assume that the Bangladesh economy will resume from the holiday in early June and the pandemic gets contained by 2020 with no second wave of the outbreak in 2020-21. Therefore our projection is sensitive to the actual nature of the pandemic and we will update our valuation as and when necessary.