Pakistan Cables Limited Report for Fiscal Year 2023
This report offers a detailed snapshot of the macroeconomic conditions, industry and company highlights of Pakistan Cables Limited (PCAL)
Disclaimer: The article below is the work of a participant of Fundamentals of Capital Market training. Sarmaaya.pk holds no liability for the recommendation mentioned.
Pakistan Cables Limited is one of the prominent cable manufacturer in Pakistan. This report includes a detailed analysis of the company. The report also includes Pakistan's country profile, its business overview, and a detailed financial, business, and management analysis. Through a thorough examination of these factors, the aim of this report is to provide investors with a holistic understanding of the company's market position and investment worthiness.
In a Nutshell
Analyst Background:
This report was conducted by Ali Jawad, a participant in the Fundamentals of Capital Market Batch 6 by Ammar Yaseen. He works as a Machine Learning Engineer with a focus on computer vision. Outside of work, He is also a big football fan and is also interested in the financial markets, from stocks and forex to commodities and crypto.
Macroeconomic Profile:
IMF Agreement and Investments: The quarter began positively with the IMF’s Stand-By Agreement (~USD 3.0bn), and expected investments from KSA and other countries, lifting market sentiments.
KSE-100 Index Performance: As of January 3, 2024, the KSE-100 Index was trading higher at 64,685.7, which indicates a significant increase since the last reported closing of 46,233 points.
Political Climate: Political stability improved with the peaceful transition to the Caretaker government and upcoming elections in Jan’24, positively influencing market conditions.
Monetary Policy:The State Bank of Pakistan (SBP) maintained the policy rate at 22%, influencing the equity market outlook. Expectations of rate cuts in the second half of FY24 and an optimistic macroeconomic outlook are predicted to enhance equity performance.
Market Trends: During 1QFY24, key contributors to the index were Banks, Oil & Gas Exploration, and Power Generation. Cyclical sectors were preferred due to high interest rates and PKR appreciation.
Sector Performance: Positive contributions came from sectors like Banks, Oil & Gas, and Power, while Fertilizer, Technology, and Paper & Board sectors dragged the index down.
Oil Dynamics: Pakistan, primarily utilizing Arab Light oil, has observed a downward trend in prices since September 2023, which may have implications for the broader economy and specific industries reliant on oil prices.
Interest Rate Outlook: The policy rate has been held at 22%, with the financial sector anticipating potential rate reductions in the second half of FY24, which could influence borrowing costs and economic investment.
Currency Valuation: The Real Effective Exchange Rate (REER) is currently at 98.146, approaching the optimal level of 100, indicating a relatively balanced valuation against a basket of currencies.
Current Account Status:The Current Account Deficit stands at approximately USD 0.9 billion, a shift from a surplus of USD 0.8 billion in the previous quarter. However, expectations are set for a surplus in September 2023, indicating a short-term improvement in foreign exchange dynamics.
Fiscal Health: Tax collections by the Federal Board of Revenue (FBR) have exceeded expectations with a significant Year-over-Year increase of 25%, signaling robust fiscal health and effective tax administration.
Inflation Concerns: Inflation in Pakistan has seen a substantial rise, with headline inflation reaching 31.44% and core inflation around 22.1%, averaging 29.04% for the quarter, posing challenges for monetary policy and household purchasing power.
Central Bank Reserves: Forex reserves have seen a decrease to USD 13.2 billion, yet there has been an improvement in the import cover, which now stands at about 1.5 months, offering a buffer against external payment shocks.
Future Outlook: The stock market's future performance is expected to be influenced by the IMF agreement, political stability, and macroeconomic indicators like FX reserves, CAD, and inflation. Increased business activity due to relaxed import restrictions is also anticipated.
Company Profile:
Overview: Pakistan Cables has been a leading name in cables since 1953, thanks to its long history and expert making of cables that people all over the world trust. It began with a great idea from its founder, (late) Mr. Amir Sultan Chinoy, and grew stronger with a partnership with a famous company in the UK. They're the only cable makers from Pakistan listed on the stock exchange, showing they're trusted and official.
They've got top-notch certifications and have worked with big names like General Cable, which helped them learn and grow. They even made a special kind of cable that's really good at saving energy, which was the first of its kind in Pakistan. This shows they're all about bringing new and smart technology to help everyone.
Ownership and Shareholding:
Market Capitalization: Six billion, one hundred thirty-one million, four hundred ten thousand, two hundred forty Pakistani Rupees (PKR 6,131,410,240).
Total Shares: Forty-nine million, five hundred six thousand, seven hundred forty-four (49,506,744 shares).
Free Float: Fourteen million, eight hundred fifty-two thousand, twenty-three (14,852,023 shares), which accounts for thirty percent (30%) of the total shares.
Financial Analysis:
Growth Factors:
Revenue Growth: The company's revenue has experienced impressive growth. From PKR 8.08 billion in 2017, there's been a consistent rise to PKR 21.17 billion in 2022. This indicates a robust expansion in the company’s sales and suggests successful market penetration and possibly an expansion of the product line or increased demand for the company's offerings.
Operating Profit Growth: Operating profit has seen substantial growth, particularly notable from 2021 to 2022 where it jumped from PKR 942.27 million to PKR 1.64 billion. This suggests not only increased revenue but also improved operational efficiency, possibly through cost management or higher-margin products.
Net Income Growth:Net income has also shown a healthy increase, rebounding from a loss of PKR 91.79 million in 2020 to profits of PKR 827.73 million in 2022. This recovery signifies a strong turnaround and financial stability, reflecting the company's ability to overcome the challenges it faced in 2020.
Earnings Per Share (EPS): The EPS presents a recovery narrative, moving from a negative EPS of -2.58 in 2020 to 23.27 in 2022. This remarkable recovery in EPS reflects not only the company's increased profitability but also its value proposition to shareholders, as it indicates higher earnings available per share of common stock.
Stability Factors:
Positive Factors:
Interest Coverage Ratio: At 5.24 in 2022, it indicates the company can easily manage its interest expenses, which is a strong sign of financial health.
Cash Flow from Operations:Positive cash flow in 2022 signifies good operational efficiency.
Return on Equity (ROE):An ROE of 9.19% suggests the company is using its equity effectively to generate profit.
Concerning Factors:
Current Ratio: At 0.94, suggesting potential liquidity issues.
Net Margin Decrease: A decrease in net margin might indicate reduced profitability or higher costs.
Increase in Total Debt: The rise in total debt to PKR 8.94 billion could be a concern if not managed properly.
Net Change in Cash: A large negative net change in cash may indicate potential issues in cash management or large investments.
Valuation Factors:
Positive Factors:
PE Ratio: A PE ratio of 5.99 in 2022 down from 9.61 in 2021, indicates the company is more attractively priced relative to its earnings.
Earnings Yield: An increase in earnings yield to 0.17 suggests better earnings relative to share price, which is a good sign for investors.
PEG Ratio: The PEG ratio of 0.19 portrays potential undervaluation of the stock given its earnings growth.
Concerning Factors:
PB Ratio: A decrease in the PB ratio to 0.55 may indicate the market values the company at closer to its net asset value, which could reflect concerns about future growth.
Dividend Yield: While still attractive at 5.63%, the dividend yield has decreased from the previous year.
Other Notes:
PS Ratio and EV/EBITDA: Both these ratios have seen a decrease, which could suggest the company is becoming more value-oriented in investors' eyes compared to the previous year.
Business and Management Analysis:
Business Factors:
Sales and Profit Performance:
Sales: In the first quarter ended September 30, 2022, sales reached Rs. 5.2 billion, a 20% increase from the same period last year.
Gross Profit: Recorded at Rs. 677.1 million for the quarter, compared to Rs. 571.3 million in the same period last year.
Finance Costs: Increased to Rs. 179.0 million from Rs. 69.6 million, attributed to higher interest rates and working capital requirements.
Profit After Tax: : The company achieved a profit after tax of Rs. 158.3 million, resulting in an EPS of Rs. 3.87, compared to Rs. 184.9 million (EPS of Rs. 4.52) in the same period last year.
Economic and Market Context:
Economic Growth: The World Bank's projection for Pakistan's economy growth is 2% for the current fiscal year.
Macroeconomic Risks: The company faces challenges due to the current account deficit, heavy debt burden, rupee depreciation, and subdued global growth.
Market Conditions: The company anticipates slow market conditions until the economy recovers, which could impact overall performance
Awards and Recognition: The company received the prestigious Top 25 Companies Award for the year 2021 from the Pakistan Stock Exchange.
Other Awards: Won the 37th MAP Corporate Excellence Award 2022, 45th FPCCI Merit Export Award, Best Corporate Report Award for 2021, and the 16th Consumers’ Choice Award 2022.
Stakeholder Appreciation:The Directors expressed gratitude to the management and employees for their hard work and dedication.
The company also acknowledges the support and trust of customers, distributors, dealers, bankers, vendors, and other stakeholders.
Management Factors:
Leadership Team:
Board of Directors: Includes Mr. Mustapha A. Chinoy, Mr. Shoaib Javed Hussain, Ms. Spenta Kandawalla, Mr. Roderick Macdonald, and others.
Executive Officers: The key executives are Mr. Waqas Mahmood (CFO) and Ms. Natasha Mohammad (Company Secretary).
Auditors: A.F. Ferguson & Co.
Legal Advisor: ASPIRELaw Advocates and Corporate Counsel
Tax Advisors: A.F. Ferguson & Co., Muhammad Bilal & Co.
Bankers: Includes Standard Chartered Bank (Pakistan) Limited, Habib Bank Limited, Meezan Bank Limited, and others
Operational Base:
Registered Office: Located at B-21 Pakistan Cables Road, Sindh Industrial Trading Estates, Karachi.
Shareholding Pattern:
As of June 30, 2020, over 22% of the shares were held by the directors, CEO, their spouses, and minor children.
Approximately 29% of shares were held under the category of "shareholders holding 5 percent or more voting rights."
The general public owned nearly 21% of the shares.
About 17% were held in associated companies, undertakings, and related parties, including International Industries Limited.
The remaining 11% of shares were owned by other shareholder categories.
Dividends:The report does not provide specific details about dividends. For the most current information on dividends, it would be best to consult the company's latest financial statements or investor relations communications.
Mutual Funds Holdings:As per the latest information, only AKD-ISF (AKD Islamic Fund) has its position in Pakistan Cables Limited (PCAL)
Strength and Weakness
Strengths:
- Substantial Asset Base:The company has a strong asset base, with total assets growing significantly over the past years from PKR 5.79 billion in 2017 to PKR 23.39 billion in 2023. This suggests a robust capacity for production and expansion.
- Substantial Asset Base:Shareholder equity has also increased consistently, from PKR 3.11 billion in 2017 to PKR 9.49 billion in 2023, indicating an increasing intrinsic value of the company and a stronger financial position.
- Healthy Reserves:Reserves have grown from PKR 1.72 billion in 2017 to PKR 4.21 billion in 2023, showcasing the company’s ability to retain earnings for future investments or to cushion against future risks.
- Robust Financial Performance: The company has shown impressive revenue growth, with a consistent rise from PKR 8.08 billion in 2017 to PKR 21.17 billion in 2022. Additionally, operating profit and net income have also seen substantial growth, indicating strong market penetration and operational efficiency.
- Award-winning Recognition and Industry Standing: Pakistan Cables has received numerous awards including the Top 25 Companies Award from the Pakistan Stock Exchange, MAP Corporate Excellence Award, and others, demonstrating its commitment to quality and corporate excellence. As the only cable maker from Pakistan listed on the stock exchange, it enjoys a strong reputation and trust.
- Solid Product Innovation and Partnerships:The company's history of innovation, demonstrated by the development of energy-efficient cables and its partnership with renowned entities like General Cable, positions it as a leader in technological advancement within its industry.
Weaknesses:
- Cash Flow Issues: Despite an increase in cash in hand and bank from PKR 52.47 million in 2017 to PKR 161.34 million in 2023, the company’s cash to debt ratio, free cash flow to CFO, cash flow per sale, and cash return on investment metrics do not look favorable. These figures raise concerns about the company’s efficiency in using its cash and generating sufficient liquidity from operations.
- Challenging Macroeconomic Environment: The company operates in a challenging macroeconomic environment with high inflation, political instability, and currency valuation issues. These factors can impact operational costs and market demand.
- Liquidity Concerns:The company's liquidity position seems challenged, as indicated by a current ratio (current assets/current liabilities) of less than 1 in 2023, suggesting potential difficulty in meeting short-term obligations without raising additional capital or liquidating assets.
- Dependency on External Factors: The company’s performance is significantly influenced by external factors such as oil price dynamics and interest rates. Such dependencies make it vulnerable to fluctuations in these areas, which can be unpredictable and outside of the company's control.
- Debt Management: The company has seen an increase in total liabilities over the years, with a significant portion as interest-bearing. This could lead to heightened financial risk if the cash flow issues are not managed effectively, especially in times of economic uncertainty or rising interest rates.
Summary
Pakistan Cables Limited exhibits solid growth potential when analyzed through the lens of asset base expansion and shareholder equity growth. With a healthy reserve accumulation, the company has demonstrated strategic financial management, positioning itself for sustainable growth. These aspects are vital strengths that enhance the company’s intrinsic value.
Nonetheless, liquidity and cash flow management emerge as notable concerns. The current ratio is below the ideal threshold, and various cash flow metrics indicate inefficiencies in the company's financial fluidity. This is compounded by a rising trend in total debt, which requires careful monitoring to ensure long-term financial stability and operational agility.
From an investment valuation standpoint, applying Peter Lynch's approach indicates a significant margin of safety at 95%. This suggests that the company's stock is potentially undervalued, offering a buffer against loss of capital for the investor. Moreover, the DCF EPS safety margin of 68.05% points to the stock being undervalued based on future cash flow projections, further indicating that it could be a good investment for the long term.
However, given the current financial considerations, particularly the cash situation and the need for robust liquidity management, it is prudent for investors to approach with caution. Regular monitoring of the company’s financials, especially the cash flow statements and debt levels, will be essential to ensure that the company is on track to improve its financial health and to capitalize on its intrinsic value.
In conclusion, Pakistan Cables Limited presents as an attractive investment opportunity from a valuation perspective. Nevertheless, investors should wait for an opportune moment when the company has demonstrated a clear trajectory towards resolving its liquidity challenges. Close observation of the upcoming financial reports will be crucial in determining the right timing to leverage the high margin of safety and the promising valuation suggested by DCF EPS metrics.