Karachi, August 24, 2021 (PPI-OT): CPHL, SEPL and PSX

CPHL: Robust growth to continue

Citi Pharma Limited (CPHL) is strongly placed for a robust run in profits given strong sales growth (highly diversified product portfolio) coupled with capacity expansions in key segments (API and Formulation), brand and contract manufacturing as well as entry into healthcare segment.

CPHL’s revenues/gross margins have grown with a 4yr CAGR of 37%/13% with majority of the revenue coming from API segment (95% on avg. in the last three years) while rest is coming from high margin Formulation segment. Whereas, the company is targeting topline CAGR of 38.3% in this 4 year cycle. The aggressive sales target looks plausible on the back of product diversification, capacity expansions, brand and contract manufacturing (Citi Pharma signed an agreement with CCL Pharma to manufacture formulation products on their behalf).

Further impetus to growth will come from capacity expansions in major segments where the company plans to enhance the capacity of Paracetamol from 3,600 to 6,000 tons (55% contribution in revenue in FY20 with 86% utilization in 1HFY21), dry powder/capsules/tablets from 20K/100K/2mn to 60K/4.2mn/4.5mn units per day and production facility of Injectable with 200,000 vials per day. All these APIs/Formulation capacities are expected to come online in CY22/CY21. Potent expansion in formulation segment creates natural synergies for CPHL as major raw material needed is available in-house. Moreover, ample duty protection in API segment (5% to 25%) helps CPHL making local production more attractive against imports with its impressive list of clients consisting of GSK Pakistan (50% sales contribution in the last three years), The Searle Company, Abbott Laboratories, and Novartis etc. Finally, CPHL plans to build a 50-bed healthcare facility expected to come online in FY23.

CPHL is currently trading at FY22F P/E,P/S and P/B of 15.3/1.1x/2.15x which offers a discount of 6/42.3/47.6% relative to the sector which is currently trading at an annualized CY21F P/E of 16.2x, P/S of 2.6x and P/B of 4.1x.

SEPL: Cheap valuations makes for an enticing investment

Security Papers Limited (SEPL) is the sole supplier of high-quality Banknote paper in the country. A large portion of its manufacturing capacity is utilized for a single product. The sales volume and capacity utilization, therefore, become largely dependent on the demand for currency notes in the Country. This also results in a high dependence on a single customer.

Company enjoys a very stable business model where the demand dynamics of its product is steady and uniform. The cost pressures are largely related to USD denominated raw materials like security thread and chemicals which are passed on. Consequently, the company is able to maintain its gross margins in the range of 35% mark. Recently, the company invested in its production capacity which is expected to shore up margins in future.

With country’s economy largely a cash based economy and GoP insatiable borrowing appetite (through PIBs and Tbills), the demand outlook remains stable in the short and medium term. Also, SEPL has made sizeable investments in financials assets (both debt and equity) which supplements the company’s core earnings.

The company is expected to announce full year FY21 earnings of ~PkR22.0/sh which means the share trades at a multiple of 7.5x based on FY21E expected earnings. The current trading multiple is at a discount of ~37% from the scrip 5yr historic trading multiple. With business model being sound as ever, we expect the current discount may not linger and the scrip may converge to its long run trading multiple.

Also, the company has maintained a healthy payout of ~50% over long run (FY20 being an exception where the payout dipped to 41%). The company is capable of maintaining a high payout in future given its robust cash generation, healthy cash reserves and short term investments and lack of any capital expenditures in the pipeline.

PSX: Cashing on improving investor confidence

FY21 stood as the strongest year in terms of volumes in PSX history with avg. turnover clocking in at 668.2mn shares with investors, taking a bet on Pakistan’s recovery story, preferred growth stocks over traditional plays as indicated by KSE/KSE-ALL volumes standing at 42.1% compared to 10y historical avg. of 61.0%. The story remains intact, despite concerns on macro front, which should keep market liquid in the near term.

Higher volumes is partly a proponent of Govt.’s crackdown on unregistered bonds (Investments in prize bonds of PkR7.5k-PkR40k is reduced by 82.5% from FY19) and larger risk appetite as indicated by 4.1% of population holding a cryptocurrency. These factors have resulted in Individual accounts at the PSX increasing by 19k during FY21, highest in the past 6 years to stand at 236,801, taking overall accounts to 257,714. Tech-adoption wave is also credited for this feat where 42.5% of accounts were opened online in Jun’21 vs. just 24.6% in Jan’21.

In another landmark, PSX received interest of 4 companies for listing, cumulatively raising PkR11.7bn – the highest amount raised in recent times, increasing the depth of the market. Our correspondence with AKD Investment Banking suggests a stronger pipeline for FY22.

Resultantly, PSX and its member companies are likely to record another year of strong earnings, having already recorded 36.2%-3.3x growth as per latest FS. PSX will also likely benefit from increase in fees and tariffs announced in latter part of 1HFY21 where assuming TTM volumes and revised fee structures, earnings of the company could arrive at PkR0.88/sh for FY22.

PSX is currently trading at a FY22 P/E of 27.3x compared to other regional listed market’s P/E of 36.5x (table on the right). Brokerage houses, namely, NEXT, EFGH, and DEL are currently trading at a P/E of 9.5x – cheap considering the integrated business model of these companies with PSX. Moreover, the implementation of minimum brokerage should assist these players to gain larger share amidst higher volumes at the bourse.