Earnings Report /
Pakistan

The Searle Company: 2QFY20 Review: Modest growth on sequential recovery in margins

  • 2QFY20 EPS of PKR2.67 (down 9%yoy, 4%qoq) was lower than projected due to higher-than-expected SG&A expenses

  • Sequential recovery in earnings on higher GMs and one-offs, while sales are beginning to recover

  • Recent price correction has opened up valuations - our TP of PKR198/sh implies a Buy rating

Yusra Beg
Yusra Beg

Senior Investment Analyst

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Intermarket Securities
28 February 2020

SEARL posted 2QFY20 NPAT of PKR567mn (EPS: PKR2.67), down 9%yoy and up 4%qoq. This took 1HFY20 NPAT to PKR1,113mn (EPS: PKR5.24), down 14%yoy. The result was lower than our projected EPS of PKR2.98/sh, due to higher than expected selling and distribution expenses. The minor sequential recovery in earnings resulted from 1.7ppt qoq rise in GMs, higher other income and a lower effective tax rate.

2QFY20 Review highlights:    

  • SEARL posted revenue of PKR4,926mn in 2QFY20 up 42%yoy although flat sequentially. While we do not read too much into the yoy jump in sales due to a re-statement of last year’s accounts, there is nevertheless a decent pick-up observed.
  • Gross margins came higher than our expectation at 49.6% in 2Q, vs. 47.8% in 1QFY20. However, this is much lower than 66.2% in SPLY, which is a one-off due to changes in reporting.
  • Selling and distribution expenses rose 30%yoy to PKR1,291mn much higher than expected, while other income rose 5.2xyoy to PKR188mn.
  • Effective tax rate rose to 27.9% (vs. 18.8% in 2Q19), but lower than 32.3% in 1QFY20.

While sales are beginning to assume a modest growth rate, (vs. volatility last year), fluid translation to the bottomline is yet to come, particularly as the impact of PKR devaluation fades. SEARL has shed c. 12% CYTD and trades at a FY20f P/E and P/S of 14.0x and 1.8x, respectively. Recent price correction has opened up valuations where our existing TP of PKR198/sh implies a Buy rating. That said, we will be looking to revise downward our estimates post availability of accounts.

Risks: (i) Further PKR devaluation from here, (ii) price reversals on ongoing pending cases and (iii) lower than expected volumetric growth