PSMC – 3QCY10 Earnings Disappoint Again

Earnings continue to disappoint: PSMC posted PAT of PKR109mn (EPS: PKR1.32) for 3QCY10, down 62% QoQ and up 113% YoY, taking 9MCY10 PAT to PKR373mn (EPS: PKR4.54).

Buoyant volumetric sales: While 3QCY10 revenues declined 20% QoQ due to lower volumetric sales, led by high base effect (2QCY10 sales up 18%QoQ), on YoY basis 3QCY10 sales were still 19% higher owing to 8% YoY jump in volumetric sales.

Gross margins plunge due to weaker PKR/Yen; Other income declines QoQ: Gross margin for 3QCY10 clocked in at 2.9%, 179bps lower than the previous quarter, primarily due to weaker PKR/Yen parity. Pak Rupee depreciated by 7.3%/6.2% during 2Q/3QCY10. Other income also fell by 22% QoQ, likely due to lower advances from customers.

Post-flood demand yet to show major weakness: Since we have already incorporated weak post floods demand, we stick to our expectation of total volumetric sales of 75,473 units for PSMC in CY10 (unit sales of 17,335 in Q4CY10) and expect CY10 EPS at PKR5.91.

Recommend HOLD at current levels: At yesterday’s closing price PSMC trades at CY11E P/E of 10.6x and offers minimal upside to our June-2011 PT of PKR 77/share.

Buoyant volumetric sales

Proposed higher GST imposition in FY11 budget triggered anticipatory buying in June 2010 which caused 2QCY10 volumetric sales to jump by 18% QoQ and invoked high base effect for 3QCY10, where volumetric sales dropped 18% QoQ. Consequently, company’s overall revenue shrank by 20% QoQ. However, on YoY basis, volumetric sales registered 8% growth, inducing a 19% YoY jump in revenue.

Gross margins plunge due to weaker PKR/Yen; other income declines QoQ

During 3QCY10, owing to 6.7% depreciation in PKR/Yen, gross margin clocked in at 2.9%, 179bps lower over last quarter, where despite a 7.3% slide in PKR/Yen gross margin was stronger at 4.7%. In our view, the ongoing decline in PKR/Yen could prompt company to raise prices to protect margins in the upcoming quarter. Furthermore, other income declined by 22% QoQ likely due to lower advances from customers, given volumetric sales fell by 18% QoQ in 3QCY10.

Post-flood demand yet to show major weakness

While floods have yet to impact demand for PSMC cars, media reports indicate PSMC has set 4QCY10 production target at 22,584 units, implying a 31% YoY and 27% QoQ jump in volumetric sales. However, remaining conservative, we have incorporated weak post floods demand, and stick to our expectation of total volumetric sales of 75,473 units for PSMC in CY10 (unit sales of 17,335 in 4QCY10) and CY10 EPS at PKR5.91.

Recommend HOLD at current levels

At yesterday’s closing price, PSMC trades at CY11E P/E of 10.6x and offers minimal upside to our June-2011 PT of PKR 77/share. We stick to our recommendation of HOLD at current levels.

Economic & Political News

Govt to launch Ijara Sukuk bonds next month: official

The cash-hungry government has planned to raise PKR35bn by issuing Ijara Sukuk bonds in the domestic market next month, which will be used to finance fiscal deficit, a top finance ministry official said. The bonds will mature in a period of one to three years and 2,200 acres of Jinnah Terminal land in Karachi will be pledged for this purpose, the central bank wrote in its annual report for financial year 2009/10
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Contributed By