It pays to invest in power sector. Those who doubt should look at the performance of Pak Elektron Limited (PEL). The firm - involved in both producing power sector equipments and electronic appliances - has been making waves at the Karachi Stock Exchange. It has been consistently over performing the benchmark index by a long shot.
COMPANY BACKGROUND PEL is the pioneer manufacturer of electrical goods in Pakistan. Established in 1956, followed by the acquisition by Saigol group in 1978 and public listing in 1988, the firm is primarily involved in two businesses: power and appliances.
The power division is involved in manufacturing and distribution of transformers, switchgears, energy meters, power transformers, construction of grid stations and electrification works. The appliances division is involved in manufacturing, assembling and distribution of refrigerators, air conditioners, microwave ovens, televisions, generators and washing machines.
RECENT PERFORMANCE After going through a bad patch in 2011, the firm has been in a recovery phase. As of third quarter ending September 2014, the firm posted a revenue growth of 16 percent year-on-year. Its gross margins improved by more than 700 basis points to about 31 percent in 9MCY14.
The mains reasons behind this growth have been improved cost efficiencies, and rupee appreciating against the dollar. The firm witnessed lower orders by the power division of Wapda and discos in CY13, but the business outlook of PEL's power division still looks good on account of the government's focus on the power sector as a whole and power generation in particular.
According to the company's segment-wise reporting data, power sector contributed 64 percent in total revenue as of CY13 from 55 percent in the year before and 47 percent in 2010. This year that contribution will have gone up, though those numbers will not be available until the time PEL releases its full year accounts. Meanwhile, PEL's margins have been improving thanks to improved capacity utilisation, the appreciation in rupee against the dollar and the decline in material cost reduction on the back of R&D activities conducted by the company.
In the third quarter ending September 2014, PEL's power division saw a growth of 5.5 percent even as the distribution and power transformer sales reduced over the same period last year on account of delays in orders of distribution and power transformers by electric utility companies.
But the sales of energy meters and EPC division, which delivers custom designed and built HV and EHV grid stations, electrification of housing projects, industrial parks, were higher. Nevertheless, the firm is banking on increasing generational capacity and specifically, in the quarter ending December 2014, it is likely to have booked ample orders for equipments in the distribution segment.
The performance of appliance division in the third quarter was "impressive" according to the director's report, though it did not spell out segment wise highlights of its P&L. According to the report, PEL's refrigerator remained the biggest revenue contributor to its appliances division. However, the firm has pinned its hopes to the recommencement of its air conditioners.
The last quarter usually sees a seasonal downturn in PEL appliances division sales. While this may reflect in quarter on quarter decline, given the higher power division sales that the firm expected to book, PEL may be able to report an Earning per Share (EPS) of about Rs 7, after having posted an EPS of Rs 5.36 in the nine month period.
While PEL doled out a 10 percent stock dividend in CY13, which was its first bonus since 2009, it has not paid any cash dividend in recent memory - well at least since 2008. And given its tight cash situation, which had forced the firm to issue 35 percent rights issue this year at the price of Rs 20 (including Rs 10 premium), it is unlikely to dole out dividends in December. The firm's stock is currently trading at an estimated forward price-to-earnings ratio of about 5.7x, which is both at a substantial discount to its pre-crisis days of 2010-2011 and also to the market.
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Pak Elektron Limited - Key P&L Highlights
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Rs (mn) 9MCY14 CY13 CY12 CY11 CY10 CY09 CY08
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Sales 15,702 16,469 17,770 11,343 17,523 14,622 12,652
Gross profit 4,839 4,055 3,644 1,065 3,708 3,338 2,837
EBITDA 3,316 2,917 309 2,668 2,082 1,878
Financial charges 1,417 1,819 2,051 1,413 1,624 1,373 994
PBT 1,931 775 161 -1,802 261 394 630
Net profit 1,614 607 115 -1,163 189 261 452
EPS (Rs) 5.36 4.04 0.59 -9.90 1.24 2.17 4.14
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