Playing to its strengths
Stronger earnings to come
* Reiterate BUY with Rs3,000 TP based on 24x FY20E PER. Catalysts from continuous strong volume growth in 1Q.
* We are impressed with APAT’s 4Q volume of 301k ton. It was at record high and increased 22% YoY/7% QoQ. Quarterly EBITDA spread recovered to Rs3.4k/ton from Rs3.1k/ton QoQ.
* FY18 net of Rs1.6bn (+5% YoY) was slightly below our estimates. This was due to oneoff IndAS accounting adjustment of Rs62m on forex loans.
* We forecast earnings CAGR of 35% FY18-20E backed by 20% sales volume and 25% EBITDA growth. We continue to believe APAT is an attractive long-term sales volume growth and margin expansion story.
* The current valuations of 15x PER/8.4x EV/EBITDA FY20E are unjustified for strong earnings growth and 26%/27% ROE/ROCE profile business.
Record sales volume to continue
APAT reported 20% sales volume growth in challenging year of FY18 (DeMon and GST disruptions). The management is confident of maintaining 20% growth pa for next two years. The expanded capacity of 2m ton would support this momentum. The high quality customized shapes and sizes, achieved through direct forming technology (DFT), will help penetrate OEMs and export markets. This will also aid better EBITDA spreads over the next 2 years. We forecast EBITDA spread of Rs3.6k/ton in FY20E vs Rs3.2k/ton in FY18.
35% EPS CAGR FY18-20E
We have revised down our FY19-20 forecasts due to IndAS adjustments. However the earnings would still rise 35% CAGR FY18-20E. ROE/ROCE will improve to 25.7/26.7% in FY20 from 20.8/20.7% in FY18. The company would generate solid cash flows as capex would be minimal. The net debt will reduce to Rs5.8bn in FY20E from Rs8bn in FY18.
APAT’s valuation is attractive despite the share price run-up in the past one year. Stock trades at a PER of 15x FY20E, even though we forecast EPS will increase by 32%/41% in FY19/20. Positive triggers are new product launches, margin expansion and pick up in residential construction activity.
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