January 09, 2025 (MLN): Pak Elektron Limited (PSX: PAEL) is poised to reach a price target of Rs58 per share by December 2025, offering a potential upside of 38%.
According to the report of Topline Securities, the target price is revised due to a better outlook for the power division, driven by the export of transformers to the US and other countries.
Additionally, the revision is supported by volumetric recovery in the appliances division and the fall in interest rates, which will help both volumes and reduce finance costs.
Topline Securities has revised its earnings forecast for 2025/2026, increasing it by 34-44%.
The new earnings per share (EPS) are projected to be Rs 5.90 and Rs 7.00, respectively, up from the previous estimates of Rs4.10 and Rs5.20 per share.
PAEL has recently started exporting power transformers to the USA and has received orders worth up to $20 million (Rs5.6 billion), according to the brokerage house’s channel checks.
The company has the annual potential to serve or execute $50mn (Rs13.9bn) worth of orders per annum.
These orders will be delivered next year in 2025 starting Mar 2025 quarter.
The brokerage house believes that higher duties on Chinese imports and higher lead time from Mexico give edge to PAEL to increase its footprints in American Market.
Additionally, the gross margins on exports to the USA market are over 30% based on Topline Securities’ channel checks, compared to the 2023 overall power segment gross margin of 23.8%.
Furthermore, the government is actively engaging with potential investors to enhance the country’s Power Division.
The key objectives include reducing energy losses and improving the electricity distribution network of the country.
These measures will ultimately increase the sale of the power division, in Topline Securities's view, in the medium term.
The report estimates a net revenue growth of 40% from the power division, reaching Rs32bn in 2025 from Rs23bn in 2024.
The power division is expected to contribute around 46% to total net sales in 2025.
The brokerage house is expecting a recovery in appliance sales due to several factors, including ease in import restrictions and improvement in consumer financing amid interest rate cuts.
Additionally, improved disposable income of the public, aided by lower inflation, is also contributing to this recovery.
Furthermore, the recovery is anticipated to be driven by expected improvements in construction activities and the continuation of urbanization.
The report expects PAEL’s appliances division to post volumetric growth of 20% YoY in 2025F after witnessing growth of over 30% YoY in 2024.
In absolute terms, appliances sales will increase by 36% YoY to Rs38bn vs Rs28bn in 2024E.
PAEL management aims to pay off all long-term debt within 2-3 years.
The company has aggressively started deleveraging its balance sheet, as evident by the total loan, which has declined from Rs22.8bn in Dec 2022 to Rs16.1bn in Sep 2024.
Furthermore, KIBOR has come down by 930bps to 13.4% from peak rate of 22.7%.
This deleveraging, coupled with a fall in lending rates, is expected to result in improved profitability by 36% or Rs2.1/share in 2025.
Topline Securities expects margins to remain at 26.5% in 2025, in line with the 9M2024 trend, due to stability in the local currency and an expected decline in inflation.
The report valued PAEL using an equal-weighted blend of the discounted cash flow (DCF) method and PAEL’s historical P/E multiple of 9.8x.
The brokerage house has used a Risk-free rate of 12% and a Risk premium of 6% to arrive at a Cost of Equity of 18% for DCF calculations.
Risks
In addition to the potential benefits mentioned earlier, it is crucial to consider key risks such as the unavailability of raw materials due to import restrictions, a higher-than-expected devaluation of the PKR, and more intense competition than anticipated.
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Posted on: 2025-01-09T11:10:16+05:00
