Watch how PEL’s debt repayment unfolds

Slowdown in economic and business activity, continuous inflationary conditions and prevailing security conditions impacted the performance of Pak Elektron Limited.

Revenue and liquidity performance

PEL reported revenues at Rs7,907 million for the half year ended 30 June, 2011 with a decline of 35.48 per cent over the same period last year. According to the management, the major reason for decline in sales of the power division was a delay of finalised orders for transformers from distribution companies whose designs were subject to approval. This resumed during May 2011, as orders worth Rs6,000 million were confirmed. Resultantly, PEL is expecting revenues to bounce back in the next two quarters. The appliances division also witnessed a decline in sales as a result of non-supply of products, soaring inflation, persistent power shortages and the after-effects of a 10 per cent federal excise duty on appliances. The finance bill issued during 2011 abolished the FED to 3.5 per cent which is expected to positively impact sales in the next season. While the current ratio for the half year ended 30 June 2011 stands at 1.3, PEL continues to depict a large stock pile of inventory mainly comprising of LG air conditioners, which, despite having undergone liquidations during the year, have been reported at Rs4,562 million with a turnover of 161 days. Historically, PEL exhibits the peak of it sales within the first two quarters of its calendar year. However, with rising inventory on hand and seasonable demand, effective management of this is a factor which is set to further test the company.

Profitability and market performance

PEL‘s gross margin was reported at 11.43 per cent for the half year ended 30 June 11 from 18.38 per cent during the same period last year. In addition the net profit margin was reported at -8.84 per cent from 2.25 per cent during the same period last year. Comparatively, costs of sales and operational expenses declined mainly as a result of the delay in orders placed with the company. Further adding to the negative profitability was the liquidation of inventories at substantial discounts. PEL reported a loss of Rs699 million or Rs-6.01 per basic and diluted share against profit of Rs275 million or Rs1.96 per diluted share a year ago. The scrip of PEL experienced lackluster performance and is reflective of general investor sentiment prevalent within the country as well as a lack of confidence regarding PEL’s leveraging concerns. The price of its share declined by approximately 70 per cent since the beginning of the year with no dividend declared for the year ended 31 Dec, 2010.

Leveraging, credit rating and cash flow

In a credit report recently released by PACRA, the long-term and the short-term entity ratings of PEL have been revised to BBB and A3, respectively from a previous rating of A-/A2. In addition, the ratings of the privately placed secured Sukuk issues have been revised to BBB+ from its previous A. These ratings are reflective of PEL depicting an ‘adequate’ capacity to repay its financial obligations on a timely basis. PEL has reported a decrease in cash for the half year ended at Rs56 million, which has also tied up the company’s free cash flow. The drain on cash is resultant of high finance costs, debt repayments and the trickling effect of negative profitability. PEL reported an interest coverage ratio of 0.27 times for the half year ended from 1.58 times during the same period last year. In order to contain this cash crunch, the company underwent a rescheduling of its long term debt obligations. Both Sukuks issued by PEL have been granted an additional grace period of two years from June 2011 and the company is currently in process of rescheduling its other long term debt obligations.

Business strategy and developments

Despite all odds, PEL’s management is focusing of future prospects and has started receiving an inflow of orders to boost its sales for the power division. PEL is one of the major electrical equipment suppliers to WAPDA and KESC and can thus strategically maneuver its business strategy in order to retain its market share. The growing order of distribution transformers indicates that the need for PEL within the power division is still at large. In addition, the launch of refrigerators under the brand name ‘Desire’ (currently the single largest contributor to total revenue) has been well received in a highly competitive appliances market. In addition, PEL can still gain a strong market share from the additional repute attached to its strategic alliance with LG and its vast dealer network, which gives the company a competitive edge. There company has focused on improving the efficiency of its appliances along with product research and development which is evidenced by the initiative taken to introduce the concept of low loss transformers. On a separate note, PEL will be able to take advantage of the recent discount rate cut by witnessing reduced future finance expenses. In our opinion, while a call for a buy isn’t recommended at this point in time, a keen interest should be taken on how debt repayments unfold at PEL. Based on this, a watch approach for key developments in both divisions should be monitored closely for the near future before a decision is taken in trading the scrip of PEL. In conclusion, PEL, with its product line advantage and production expertise should overcome the current situation and boost its performance subject to the pace of economic activity over the longer term.