Equity Analysis /
Pakistan

Thal Ltd: 2QFY20 corporate briefing takeaways

  • THALL is trading at a TTM P/E of 11.52 which is similar to the Auto OEMs of average 11.67 & the stock has risen 6% CYTD

  • Thal Boshoku has expanded operations into car seats manufacturing, with a capacity of 40,000 seats per annum.

  • Jute sales (in the Allied Products division) have grown significantly during 1HFY20 and has sold around 3,000MT in 1H.

Intermarket Securities
1 March 2020

Thal Limited (THALL) posted 2QFY20 consolidated NPAT of PKR956mn (EPS: PKR11.8), up 8%yoy due to an increase in overall company sales, except for the Engineering division (due to depressed auto sales) and the Papersack division (due to pressure in the cement sector). Gross Margins, however, decreased from 19.4% in 2QFY19 to 18.8% in 2QFY20.

Key highlights: 

Engineering Segment

  • Car sales during 1HFY20 declined about 46% yoy. This led to an overall decline in Engineering division’s sales. The company however has a positive future outlook with regards to auto sales given a good trend in January-February 2020. They are also expecting business from foreign customers after a successful Auto show trip in Riyadh. 
  • Thal Boshoku has expanded operations into car seats manufacturing, with a capacity of 40,000 seats per annum. They are mainly making seats for the upcoming Yaris (as well as other components). They also have the potential to add other car models into the mix (other Toyota models), and they have approached other OEM’s (Hyundai, Suzuki, other new entrants). The company claims to have an advantage over other seat manufacturers due to their ventures with foreign companies (experience in making better quality seats). 
  • THALL has approached and signed an agreement with Hyundai for the production of various components of the Hyundai H-100 Porter LCV, which will start production in May/June 2020. 
  • Thal Electrical Yazaki plant will be inaugurated next month (which produces electrical wires and harnesses division). 
  • Due to contracts with multiple OEMs and thus scale, THALL has the advantage of spreading out fixed overheads over their products, making it cost effective for OEM’s to outsource the production of various components to THALL rather than produce it in-house.

Building Materials and Allied Products Segment 

  • The majority of sales of the Papersack division (PS) are to the cement industry (about 78% of total PS sales). The PS division has been facing issues due to declining cement sales and cost pressures in the cement industry, where paper bags are being replaced by cheaper polypropylene bags (PP). This is due to the disparity in customs duty (on paper and board tariffs, are about 16-17% while duties on PP products is around 3%). This, along with the recent PKR devaluation, has hurt the segment’s profitability. 
  • THALL, however, is optimistic about future cement dispatches, which will eventually lead to an increase in paper based sales for the segment. They are meeting with the tax authorities with regards to the rationalization of tariffs for paper and board with PP products (they claim the Government will earn about PKR5/unit from papersack sales while they earn only PKR0.5/unit from PP sales). THALL is also expanding their cement line in the PS division to cater to recent expansions. 
  • Besides sales to cement industry, local sales for carrier and other bags has seen positive growth in 1HFY20. 
  • Jute sales (in the Allied Products division) have grown significantly during 1HFY20. THALL has sold around 3,000MT of jute in 1H with plans of doubling sales in 2H. Note that the company sold a total of 3,500MT of jute during FY19 (35% market share).

Real Estate Management & Others

  • This segment has posted better performance in 1HFY20. The recent documentation drive of the Government has given this segment a competitive advantage other its competitors (which did not fall into the sales tax segment). 
  • With private construction forecasted to pick up in the near future, sales of the Baluchistan Laminates division (Formite brand) will see a boost in sales in future. 
  • The Real Estate segment (2% of total revenues) is already very profitable, management is working on new projects to maintain present growth. 
  • The company announced plans for the completion of Phase 2, which shall be up and running by the end of December 2021 or early 2022, with financial closure targeted by end March 2021 for Thal Nova. (out of THALL’s stake, 30% of equity investment has been made while the remaining 70% commitment is on standby).

THALL is presently trading at a trailing P/E of 9.6x which is lower compared to average valuations of the Auto OEMs of 11.67x. The stock has risen 11% CYTD.