Equity Analysis /
Pakistan

Honda Atlas: Q4 MY 19 results – earnings beat due to multiple positives

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    20 May 2019

    HCAR announced Q4 MY 19 NPAT of PKR1,169mn (EPS: PKR8.18), down 15% yoy but up 94% qoq, much higher than our EPS expectation of PKR4.91. The earnings beat came about due to sequentially improved gross margins, OPEX control and lower effective tax rate. This took MY 19 NPAT to PKR3,851mn (EPS: PKR26.97), down 41% yoy. Along with the results, HCAR also announced a surprisingly high dividend of PKR12.15/sh.

    Major highlights from the Q4 MY 19 results: (i) gross margins of 7.8% (versus 7.7% in Q3) as the PKR remained stable against the US$ during Jan-Mar’19; (ii) 32% yoy reduction in distribution expenses as the company may have scaled down its year-end bonuses; and (iii) 21% effective tax rate booked during the quarter. The yoy drop in Q4 earnings is mainly attributable to 18% yoy lower volumes, PKR depreciation affecting margins and lower other income due to reduced customer advances.

    PKR depreciation during MY 19 resulted in a 41% yoy drop in earnings. Additionally, volumes also declined by 3% yoy during the year while shrinking demand meant lower customer advances hurting other income.

    Our Mar’20 TP of PKR235/sh implies a Buy rating on the scrip. At a market cap of US$120mn, the stock appears to trade significantly below its replacement value (Kia and Hyundai are setting up plants of 30k annual capacity at cUS$140mn). We understand there are concerns on HCAR’s future sales due to 10% FED (on cars above 1,700cc), but the stock has shed half off its value since this was imposed and the government may remove this duty considering a c60% yoy reduction in sales (that will more than offset the tax intended to be raised from this measure).