Equity Analysis /
Pakistan

The Searle Company: FY 19 preview: PKR devaluation to drag full-year earnings despite price hike

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    27 September 2019

    Q4 FY 19 preview highlights: 

    • SEARL is expected to post Q4 FY 19 NPAT of PKR475mn (EPS: PKR2.24), up 36% yoy, taking FY 19 NPAT to PKR2,248mn (EPS: PKR10.58), down 16% yoy. We expect SEARL to announce final cash dividend of PKR5.0. Note that SEARL has not paid out dividends so far in 9M FY 19.
    • Sales revenue is expected to rise to PKR5,186mn (up 17% yoy). This is driven by flat 15% price hike received in Q3 FY 19, which should help offset 13% PKR devaluation in H2 FY 19.
    • This is expected to lead to c2ppt yoy rise in GMs to 43%, in our view (Q4 FY 18 GMs: 41%), while price reversal on hardship cases should have a nominal impact on pricing, in our view. Margins are expected to come off sequentially due to seasonality.
    • We expect SG&A expenses to remain elevated, while we expect effective tax rate to accelerate to 25% (vs. 23% in Q3 FY 19).

    FY19 preview highlights: 

    • On full-year basis, (i) SEARL is expected to post a 13% yoy growth in revenue to PKR18,560mn, however (ii) despite 15% price hike in H2 FY 19, impact of 19% (on avg.) PKR devaluation during the year is likely to drive GMs lower, to 48% (vs. 51% in FY 18). (iii) SG&A are expected to remain elevated (up 15% yoy), while (iv) finance costs are expected to increase 90% yoy due to higher reliance on ST borrowings.
    • SEARL gained 18% in the early part of Sep’19 in anticipation of upcoming acquisition of OBS Pakistan and has since shed 13% to-date. SEARL trades at a FY 20f P/E and P/S of 9.9x and 1.3x respectively. We have Jun’20 TP of PKR188/sh and a Buy rating on the name.