1

M Daniyal Kanani Daniyal.kanani@taurus.com.pk Direct: +92‐21‐35216403

Please refer to the end of the report for Analyst Certification and important disclosures.

Avanceon Limited Submerged in a plethora of contracts — ‘BUY!’

We present our investment outlook on Avanceon Limited (AVN) with a Dec’17 DCF

based TP of PKR52/sh, warranting a BUY call. The TP offers a return of 34% from

the last day closing price, while the scrip trades at a P/Ex multiple of 13.0/9.7 for

CY17E/18F.

Key Triggers to our investment case include:

Company’s strong foothold in the Middle Eastern countries where it expects

revenues in excess of USD35mn on the back of strengthening macro economic

factors and infrastructural works for the upcoming FIFA world cup 2022. Con-

tracts for Qatar Rail (USD7.5mn as of now) would remain the significant con-

tributor. Due to hefty capital requirements, AVN is likely to raise funds through

equity, going forward.

Growth prospects in the domestic industries opening up further avenues for

Avanceon. To note, 50% of the revenues flow in from the domestic market with

a major chunk from Oil & Gas sector followed by Food & Beverage, FMCG’s and

Cement. Burgeoning POL products demand (~5% CAGR till 2020), setup of

three more LNG terminals, rapid development in infrastructural works justify a

boost in automation demand.

Stepping into new ventures such as Building Management Systems and the in-

troduction of Cloud Computing and Remote Monitoring technologies for the ser-

vice sector. Revenues worth PKR250mn are expected to be generated in the

course of 3 years.

Exalted gross margins ranging from 33% to 41% in the past 5 years. The man-

agement feels confident that margins would stay in the same ambit with that

from the recent Qatar projects exceeding 40%. Moreover, a 30% growth in top-

line for the next couple of years along with materialization of Qatar Rail pro-

jects in CY19 would lead revenues to cross the PKR5bn mark.

The company’s run-rate (projects currently in pipe-line) of 20 months ensure a

consistent top-line even in the absence of further contracts (though that seems

unlikely).

Avanceon’s partnership with multiple local and International vendors including

Rockwell Automation, Belden, Microsoft etc. making it the official distributor/

systems integrator.

The Lucrative Qatar market:

Qatar has been diversifying its economy into non-hydrocarbon sectors which has ena-

bled it to prosper even in a low-oil price environment. The construction sector itself

grew about 12% in 2016, while the overall GDP growth stood at 3.8%. Stable oil pric-

es and newly discovered gas reserves present an even better outlook for the ongoing

year. On top of this, the 2022 FIFA world cup would be hosted by Qatar and the gov-

ernment is spending huge amounts of money on infrastructure, transportation sys-

tems, stadiums, complexes, marinas, etc. Development worth USD45bn has already

begun at “Lusail City”, dedicated for this purpose.

Without any doubt, automation would be at the core of these services and Avanceon

is perfectly positioned to reap the advantage. It has worked on projects associated

Fresh Money

April 17, 2017

www.JamaPunji.pk

REP-040

Price Performance

Source: PSX & TSL Research

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Avanceon (adjusted)

Rel. KSE-100

AVANCEON PA BUY

Stock price 39

Target price 52

Current upside/(downside) 34%

Outstanding shares (mn)* 132

Market Cap (PKR bn) 5.1

Free float 24%

3M Avg. daily value traded (PKR mn) 27

3M Avg. daily volume ('000) 519

3M High 47

3M Low 33

Key financials PKR mn

Year end CY15A CY16 CY17E CY18F

Net sales 1,636 2,064 2,773 3,589

Cost of sales 1,098 1,317 1,890 2,448

Gross Profit 538 746 883 1,141

Oper. profit 303 446 510 668

PBT 273 396 474 633

PAT 242 331 395 532

Key matrics CY15A CY16 CY17E CY18F

EPS* 1.83 2.51 2.99 4.03

DPS* 1.60 0.80 2.00 2.00

BVPS* 14.66 15.26 16.87 19.04

P/E (x) 21.27 15.53 13.02 9.67

P/BV (x) 2.66 2.55 2.31 2.05

Dividend Yield %4% 2% 5% 5%

EPS growth %-55% 37% 19% 35%

ROA %9% 11% 11% 13%

ROE %12% 16% 18% 21%

Source: Company Accounts & TSL Research

*Based on current number of shares outstanding

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with Dubai metro, Lusail Utility tunnels, etc. in the past (capitalizing on its expertise

of safety services), and is now looking forward to working on Qatar Rail projects. The

revenue expectations exceed USD35mn to be realized in 3 years where the company

has already been awarded a contract worth ~USD7.5mn while another one of the

same magnitude is anticipated to be awarded by next month. To quote, total ex-

penditure on the rail system by the Qatari government would be ~USD30bn which

represents just 17% of the investments reserved for the rail system in the GCC region

(suggesting a ripe landscape for the automation industry in the upcoming years).

The domestic downstream oil sector: OMCs and Refineries:

One of the potential business opportunities in the local business environment exists in

the downstream oil sector: OMCs and Refineries. The demand for POL products cur-

rently stands at ~25mn tons/annum, increasing at a CAGR of >4.6% till 2020; and

government’s policies require all the OMCs to maintain 20-25 days of stock

(depending on the product). Under these circumstances, we expect at least 70k tons

of storage capacity to come online every year where inventory management would be

at the core of those developments. Avanceon provides Auto Tank Gauging & Metering

Systems and complete SCADA systems to optimize the inflow and outflow of fuels

effectively. It also handles the integrated ERP systems for “Truck Loading and Ac-

counting” to minimize human error. Moreover, the automated systems also provide

safety arrangements such as Fire Alarms and sensors etc. Avanceon has worked pre-

viously with many upstream and downstream players in the oil chain namely APL,

PRL, Mari etc. and expects further contracts in the wake of new developments in this

sector. Lastly, Avanceon also has a standing in the LNG plant setup. It provided ser-

vices to the tune of PKR125mn for Engro Elengy Terminal Private Limited and fore-

sees further contracts as 3 more LNG terminals are in the pipeline (including a

600mmcfd terminal to be completed this year by Pakistan GasPort Consortium and a

750mmcfd terminal to be operational by 2018 by Global Energy Infrastructure Lim-

ited).

An era of High-rise buildings and skyscrapers:

Due to rapid development, Pakistan is witnessing a rise in the construction of high-

rise buildings for both commercial and residential purposes. Maintenance of these tall

structures require centrally controlled mechanisms, often referred to as Building Man-

agement Systems (BMS). Avanceon identifies this as an opportunity for its mainte-

nance business (After Market Sales). As of now, there are more than 20 high rise

buildings (>100m) in Karachi and Islamabad alone, and the figure is expected to

cross 100 by 2020 in our view. The revenue expectations from this segment would

exceed PKR250mn by CY18, with margins over 50% as the work mostly involves ser-

vices (and not equipment where the margins are low). Such incentives create a win-

win situation where the company enjoys hefty margins while the client saves in vari-

ous costs such as electricity bills up to 40%. Recently, Avanceon worked on Nishat

group’s Emporium Mall.

Specialized business segment: An innovation in Pakistan:

The latest update from Avanceon combines remote process control and monitoring

with cloud computing, whereby information can be accessed remotely with round the

clock availability via the internet. This enables clients to rely completely on a third

party with cost optimization and on the go availability without purchasing huge data

storage systems. Avanceon is installing the first of its kind at K-Electric with a cost of

~PKR68mn, and has devised an efficient payment method whereby the company

would install the system after taking a minimal amount from the client and the client

would then pay once it starts realizing cost savings. As per the management, this

could be a game changer in the automation arena bringing complete dashboard and

performance parameter visuals to a screen.

OEM goes for local manufacturing:

Avanceon plans to initiate domestic assembling facility for one of its OEM suppliers

Few of the upcoming high-rise

buildingsLocation Height (m)

Dolmen City Tower 3 Karachi 210

Dolmen City Tower 4 Karachi 210

Frere Excellency Karachi 200

Bahria Opal 225 Karachi 160

Hoshang Pearl Karachi 146

Com 3 Tower 2 Karachi 126

Pearl Tower - I Karachi 99

Pearl Tower - II Karachi 99

CPEC Tower Islamabad 220

Grand Hyatt Islamabad 180

Grand Hyatt Islamabad 180

Source: TSL Research

Geography State of Qatar

Location 15km North of Doha

Area 38 square ki lometres

Investment USD 45 bi l l ion

Population 450,000 people

Source: Parsons.com, Lusail.com & TSL Research

4) An underground car parking

5) A renewable energy project

6) High rise bui ldings

7) An underground Metro Link

Lusail Development Project

Infrastructure includes:

1) 21.5 ki lometres of roads , highways etc

2) 36.8 ki lometres of i rigation channels

3) A sewage treatment plant

Increasing POL consumption (mn tons)

Source: OCAC & TSL Research

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20F

MS, HSD and FO combined(LHS)Storage Requirement

currentstorage level

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“Kobold Messrings”. The domestic assembling of valves (used to control the flow of

fluids) would give Avanceon an edge as imported valves are subject to ~15% duty,

which the client would save partially. This would make the product cost lower, in turn

prompting more clients to purchase directly from Avanceon. The company expects

that this move would slightly proliferate the sales as equipment constitutes 48% of

the core business.

International Execution Business Model:

The company capitalizes on its unique business model called “International Execu-

tion”. Under this model, projects in Middle East are charged on man-hour basis where

post-training, a team of engineers and technical workers is sent to work abroad.

Since the labour is actually based in Pakistan, the company incurs less cost on their

wages and saves ~USD118/hr as local engineers charge USD32/hr (as compared

with USD150/hr for a foreign engineer) for such projects. Leveraging on the model,

the company can quickly scale up or downsize its team because the costs are mini-

mal. It is pertinent to mention here that Avanceon’s office in Dubai comprises only of

sales team comprising of 15-20 employees whose work is to procure contracts and

negotiate the details.

Consistent revenue growth with extravagant margins:

Our conviction on AVN’s growth story becomes even stronger with the company’s run

-rate* averaging almost 18 months. The combined worth of all the outstanding con-

tracts exceed USD24mn which is the highest in the company’s history. Moreover,

macro trends in the automation industry coupled with overall development in Paki-

stan across all sectors support a 30% growth in revenues. Further, with Qatar rail

project secured, a one-off blip of >PKR1bn is expected as contracts materialize in

CY19 making its top-line cross PKR5bn mark. Digging further, projects in Qatar are

expected to fetch margins well above 40% as opposed to historic Middle East/USA

margins of ~18%. Revenues shall drop post CY19 but pick gear once again as After

Market segment with exalted margins of ~41% would garner attention, in our view.

A typical valve

Source: Kobold & TSL Research

*By run-rate, the company refers to the

number of months it can sail through without

securing any further contracts.

Client Contract Details ('000 USD)

Schnieder Electric, Pakistan Supply, installation, commissioning of frequency drives at Gambat. 410

Mari Petroleum Supply and services of SCADA at Sujawal gas field. 220

MOL Pakistan Supply and services of 2 wellheads. 270

Presson Descon International Supply and services of fire and gas detectors at Gambat. 160

K-Electric Limited Services and supplies for real-time performance monitoring and optimization. 680

Descon Engineering FZE Fire and gas detection for OGDCL. 588

Descon Engineering FZE Supply and services of truck loading automation. 600

Mari Petroleum Supply, installation, commissing of electrical items at kalabagh field. 270

APL Supply, installation, testing and commissiong of main LV, HV panel etc. and

installation of other electrical items at Islamabad fuel farm.1190

Six construct, Sharjah, UAE Extension of sewage second phase, design supply, install etc of SCADA/PLC. 1030Oil & Gas Development

Company LimitedDesign, manufacture, supply, test, commission of Distributed control system. 380

Engro Polymer & Chemicals

LimitedSupply of motors. 120

AA Turki Company, KSA Supply, testing, commissiong of Ras Tanura refienry. 1250

Trinity Engineering, Qatar Supply, testing, commissioning of building management system. 200

Six construction, Dubai, UAE SCADA and PLC for waste water system of Ajman. 230

HUBCO Plant information and performance management system. 270

Attock Petroleum Limited Supply and installation of PLC system, auto tank gauging system, bowser

metering system, CCTV, fire alarm etc.

750

Power Cement Supply of motors. 400

Sinohydro Corporation Material supply, delivery storage, testing, commissioning, etc . 250

Qatar Rail Installation of safety systems. 7140

Source: PSX, TSL Research

4

Fresh Money

List of a few contracts:

Automation services thriving at a CAGR of 6.6% globally …

According to the McKinsey global institute, as much as 45% of human activities can

be automated. With technological advancement now at unprecedented levels, the

need to make processes smoother, faster and highly accurate is becoming a necessi-

ty. Growth prospects can be gauged from the fact that industrial automation market

size stood at ~USD185bn globally in 2015, and is expected to reach ~USD352bn by

2024, at a CAGR of 6.6%.

UAE, Qatar and KSA are the major consumers of automation and related service

when it comes to Middle East. The entire automation market size in that region can

roughly be estimated around USD346mn with Oil & Gas industry being the major de-

mand driver. Since the steep decline in oil prices, projects from this industry have

dried up. But on the contrary, housing, healthcare, transportation sectors have at-

tracted investments in this area and are anticipated to further boom.

The fixation of FIFA world cup in 2022 in Qatar has opened up avenues for further

advancement in this domain. The development of Lusail City and associated works

have given rise to an entire automation market addressing requirements specific to

sporting, living, transportation and auxiliary arrangements.

It is imperative to mention here that the developing countries are accounting for a

sizable portion when it comes to the demand side, with Brazil and India opening up

avenues as the manufacturing facilities speed up. With the progression of China Paki-

stan Economic Corridor (CPEC), macroeconomic situation in Pakistan is improving,

and companies are fast adopting latest innovations to fuel their production capacities.

… while companies hold on to their geographical boundaries…

In the global market scenario, the top 4 global players with a strong foothold in the

market combined held a share of 12.2% in 2015. Europe leads the automation mar-

ket, with almost 30% market share, while Asia Pacific and North American region

follow with ~25% market share each.

Depending upon their area of expertise and compliance with the local rules, automa-

tion companies usually operate in their fixed regions because establishing footprint

takes sufficient time and knowledge of the needs and requirements. Avanceon cur-

rently enjoys ~1% market share in the world through its subsidiaries in the Middle

East and USA.

...with Avanceon dominating the local market.

The domestic industry is slowly but gradually realizing the importance of automation

in various industrial processes. Food and beverage industry accounts for ~33% of the

total demand generated in Pakistan and is expected to further bloat as local compa-

nies try to proliferate their share in a USD3trn global halal market, while cement sec-

tor is gradually moving towards the adoption of control systems to meet the desired

chemical compositions and enhance quality (recent example being Power Cement

which procured motors for its plant). Not to forget the soaring demand for POL prod-

ucts where automated solutions make inventory management and hazard avoidance

easier for the oil storages.

Avanceon is the largest automation services provider in Pakistan, having a market

share of almost ~60%. It has strategic partnerships with the worlds finest OEMs and

solution providers. Intech and ABB are the 2 unquoted competitors also operating

locally but are focused towards the oil and gas sector only, whereas Avanceon capi-

talizes on its diversified portfolio of services.

Technology

Regional Partners

Source: Company Accounts & TSL Research

Avanceon Partners

Global Automation Market by Geography

Source: Industrial Automation Market - Global

Industry Analysis, Size, Share, Growth, Trends,

and Forecast 2016 - 2024.

28%

26%

24%

12%

11%

Europe Asia Pacific

North America Middle East & Africa

Latin America

Global Automation Market (USD bn)

Source: Statista.com & TSL Research

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Business Model and Operational Review:

The entire business can broadly be categorized into 2 major sources of revenue for

Avanceon: i) services whose share is ~40%, and ii) equipment trading constituting

~60% of the pie. As per our conversation with the management, the company enjoys

50-60% margins on services, while 20-40% margins are withheld in equipment trad-

ing business.

While the company’s top-line depends on the nature and size of the contract being

awarded, development in the local industries and the upcoming events in the compa-

ny’s other operating regions ensure a consistent top-line going forward, overshadow-

ing the uncertainty in the inflows. Moreover, other operating and non-operating costs

are minimal, translating healthy margins into higher earnings.

A simple break-up analysis of the company reveals that its overall operations can be

sorted into 3 different categories.

1) Core services: Core services pertain to the provision of such tools and services

that assist in automatic handling of the processes and improvement in the accuracy

of core operations. At the same time, such services make sure the industrial process-

es are more compliant with the regulatory requirements. Cost reduction, operational

excellence and solid control over various stages of the operations through a central

point are the major benefits achieved. Under the segment’s umbrella, AVN also acts

as an integrator for well-known automation equipment manufacturers.

The company has been consistently enjoying ~30-31% margins on core services. In

the years to come, with a bit of competition to be experienced by the company, we

believe the margins might shrink slightly and hover around ~29-30%.

2) Specialized solutions: Under this umbrella, the company facilitates the clients to

attain efficiency in certain areas such as scheduling, inventory management, down-

time etc. Moreover, energy savings and carbon credits are also avenues in which

Avanceon provides its services. It helps companies in selecting the best technology

for the purpose and then sets it up after a thorough testing phase. The margins on

this kind of service is exceptionally high (~60%). Building Management Systems

(BMS) falls under this category where the company has recently decided to step in.

3) After Market Solutions: After market solutions are similar to after sales support,

where Avanceon gets into contractual relations with its clients for maintenance of the

core service provided. This service depends entirely on the clients’ specific needs.

Further, the company also engages in training the supervisors and engineers of the

client so as to ensure smooth running of the installed service.

Since after-market mostly involves the provision of services, the margins are high

(~47%). These after market support services are also provided to new clients/

customers who had previously not approached AVN for the installation of the automa-

tion systems. Capitalizing on this approach, the company is able to charge a premium

to provide support assistance for such systems.

Industrial Automation

Industrial Automation can be defined as the

use of set technologies and automatic con-

trol devices that result in the automatic

operation and control of industrial processes

without significant human intervention and

achieving superior performance than manual

control. These automation devices include

PLCs, PCs, PACs, etc. and technologies in-

clude various industrial communication sys-

tems.

Levels of Automation

Source: electricaltechnology.org

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About the company:

The company is engaged in the business of designing, developing, and implementing

automation, process controls, systems integrations, proprietary energy management

solutions and support services; and whilst doing so, it also trades in the products and

equipment required for such services. As of now, it is a holding company having sub-

sidiaries in the United Arab Emirates (Avanceon FZE) and the United States of Ameri-

ca (Engro Innovative). Also, it enjoys 26.13% shareholding in Avanceon LP via Engro

Innovative.

Total outstanding shares of the company are 132.11mn with a free-float of 32.34mn

shares (24.4%). The Wain family owns 99.09mn shares (~75%), while the majority

of the remaining shares lie jointly with mutual funds and general public.

Avanceon has been automating various processes and facilities in and outside Paki-

stan. It has 3 regional operational centers in Pennsylvania (through which it controls

the North American region), Dubai, and Lahore (which gives it control over the Middle

East and South East Asian region). The company is a certified member of Control

System Integrators Association.

Branching out to a new territory: Qatar

In a recent filing with the bourse, the company notified that it has established anoth-

er subsidiary in Qatar to cater to the upcoming projects. As 80% of the business is

tender based in Middle East, the company felt a need to fortify its presence in that

region. Moreover, Avanceon has been appointed as an authorized distributor of

“Belden Hirschman & Lumberg Industrial Connectivity Products”. Belden produces

and sells a comprehensive portfolio of connectivity and networking products into a

variety of markets. Recall that margins on equipment vary between 30-40% and are

often subject to change depending on the client.

Valuation Details:

We have based our valuation on Free Cash Flows to Equity (FCFE) basis as the com-

pany possesses no long-term debt. Our model entails a risk free rate of 7.5%, a risk

premium of 6%, and a terminal growth rate of 5%. We arrive at a Dec’17 TP of

PKR52.3/sh, offering an upside of 28% from LDCP. The stock trades at CY17E/18F P/

Ex ratio of 13.7/10.2.

Avanceon shareholding pattern

Source: Company Accounts

75.0%

12.7%

11.8%

Sponsors, Directors, CEO, ChildrenGeneral PublicFunds & OthersForeign Companies

Key Assumptions

beta 1.20

Rf 7.5%

Risk Premium 6.0%

Cost of Equity 14.7%

Terminal Growth 5.0%

Institutional Holdings No. of Shares (mn) %

Tundra Pakis tan Fund 7.3 5.5%

NAFA 4.7 3.6%

MCB Funds 0.6 0.5%

Sherman Securi ties 0.6 0.5%

Source: Company Accounts

PKRmn CY17E CY18F CY19F CY20F CY21F

FCFE 345 585 309 601 756

TV 8,192

PV of FCFE 345 510 235 398 437

PV of TV 4,735

PV of cash flows 6,660

Cash 252

No. of Shares 132

Target Price Dec'17 52

7

Fresh Money Automation Companies around the globe

Key Risks:

Pakistan’s economic slowdown

Pakistan’s economy is projected to grow by 5.2% going forward mainly driven by

foreign investments. Any adverse shock in the form of political uprising or deteriora-

tion in foreign relations might restrain the ongoing developments which are a major

source of revenue for the company.

Civil turbulence in the Middle East

Tension in the Middle East is rife with political interventions from many other coun-

tries. Qatar, being in the same region, is prone to such unrest as it hosts a lot of im-

migrants belonging to different cultures. Any backlash could potentially dampen the

pace of developmental projects not only in Qatar but in the entire region.

Slump in oil prices

Despite its diversification, a major chunk of the company’s revenue pie is composed

of Oil and Gas based contracts. A surge in the number of active rigs has given a rise

to shale output reducing the effectiveness of OPEC led alliance to cut production.

Consequently, a dip in oil prices could hamper the projects from that segment.

Stern action by humanitarian organizations over construction activities

The buildup of stadiums and related projects for the Qatar world cup 2022 has al-

ready invited a lot of criticism from NGOs around the globe which protested on hu-

man rights violation during the construction of those stadiums. FIFA itself came under

fire over its failure to consider human rights issues and its reluctance to exert an in-

fluence to improve the situation. In the situation persists, possible shift of venue

might be considered severely impacting the revenue stream of the company.

Name Country P/Ex P/Sx

Shenzhen Maxonic Automation China 249.93 9.19

China High Precision Automation Group China NM 8.40

Honeywell Automation India 54.49 4.35

ABB India India 79.00 3.76

Rockwell Automation Corp. USA 25.81 3.41

Intech Limited Bangladesh 13.33 2.76

Systems Ltd* Pakistan 16.42 2.70

Brooks Automation USA 40.37 2.49

Avanceon Pakistan 15.53 2.15

HollySys USA 11.42 1.99

Netsol* Pakistan 40.75 1.30

China Automation Company China NM 1.00

Source: Bloomberg & TSL Research

*These are not automation companies but are included for domestic comparison.

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Productivity (PKRmn/employee)

Source: Company Accounts & TSL Research

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Personnel Productivity(LHS)Return on HumanCapital

Key Ratios CY14 CY15 CY16 CY17E CY18F CY19F CY20F CY21F

Profitability

Gross Margin % 35.8 32.9 36.2 31.8 31.8 32.7 30.9 30.4

Operating Margin % 24.1 18.5 21.6 18.4 18.6 20.1 19.3 18.9

Net Margin % 22.2 14.8 16.1 14.3 14.8 16.7 15.7 15.4

Return on Assets % 17.1 8.9 10.8 11.3 13.1 21.2 15.2 15.6

Return on Equity % 25.7 12.5 16.4 17.7 21.1 34.3 23.1 22.7

Personnel Productivi ty PKRmn/empl 13.5 11.0 13.1 14.8 16.9 26.4 23.9 27.0

Return on Human Capita l PKRmn/empl 3.0 1.6 2.1 2.1 2.5 4.4 3.8 4.2

Liquidity

Current Ratio times 2.6 3.1 2.6 2.5 2.4 2.4 2.8 3.1

Cash Ratio times 0.6 0.5 0.3 0.3 0.3 0.3 0.5 0.6

Activity

Human Capita l number 143 149 157 187 212 237 212 197

Assets/personnel PKRmn/empl 18.0 19.2 20.9 19.9 20.9 22.9 23.8 27.6

Sa laries wages per personnel PKRmn/empl 1.6 1.9 2.1 2.2 2.4 2.6 2.7 2.9

Investing

EPS PKR/sh 3.2 1.8 2.5 3.0 4.0 7.9 6.0 6.2

DPS PKR/sh 1.8 1.6 0.8 2.0 2.0 6.0 4.0 4.0

BVPS PKR/sh 12.6 14.7 15.3 16.9 19.0 23.1 26.1 27.3

Earnings Growth % 3.7 (43.4) 36.9 19.3 34.6 96.7 (23.7) 2.5

Payout Ratio % 55.7 87.4 31.9 66.8 49.7 75.8 66.2 64.6

Source: Company Accounts & TSL Research

Gross Margins of the top 3 Segments

Source: Company Accounts & TSL Research

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1F

Core Business Engineering

Middle East/USA

ROA & ROE (%)

Source: Company Accounts & TSL Research

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Return on Assets

Return on Equity

Revenue from top 3 Segments (PKRmn)

Source: Company Accounts & TSL Research

0

500

1,000

1,500

2,000

2,500

3,000

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5

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Core Business Engineering

Middle East/USA

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Fresh Money

Financial Snapshot

Income Statement

PKR mn CY14 CY15 CY16 CY17E CY18F CY19F CY20F CY21F

Sales 1,928 1,636 2,064 2,773 3,589 6,256 5,068 5,322

Cost of Sales 1,237 1,098 1,317 1,890 2,448 4,212 3,504 3,705

Gross Profit 691 538 746 883 1,141 2,044 1,564 1,617

Admin and Selling Expenses 233 291 322 391 498 815 642 674

Other Charges 25 5 10 9 9 9 9 9

Other Operating Income 31 61 32 27 34 38 66 73

Profit from Operations 464 303 446 510 668 1,257 978 1,007

Finance Costs 21 31 50 36 35 35 37 39

Profit Before Tax 443 273 396 474 633 1,223 941 968

Taxation 16 31 65 78 101 177 143 150

Profit for the year 427 242 331 395 532 1,046 798 818

EPS - Basic* 3.23 1.83 2.51 2.99 4.03 7.92 6.04 6.19

DPS* 1.80 1.60 0.80 2.00 2.00 6.00 4.00 4.00

Balance Sheet

PKR mn CY14 CY15 CY16 CY17E CY18F CY19F CY20F CY21F

Equity

Authorised Capital 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

Issued, Subscribed and paid-up capital 1,057 1,057 1,057 1,321 1,321 1,321 1,321 1,321

Share Premium 62 62 62 62 62 62 62 62

Employees' share compensation reserve 45 45 52 52 52 52 52 52

Exchange Revaluation reserve 185 210 209 217 226 235 245 254

Un-appropriated Profit 574 579 700 725 993 1,775 1,780 2,070

Total 1,922 1,952.5 2,080 2,378 2,654 3,445 3,460 3,759

Surplus on Revaluation 90 110 112 112 112 112 112 112

Non- Current Liabilities

Deferred Tax 31 40 65 67 69 71 73 75

Liabilities against assets subject to lease 34 35 45 40 43 45 47 50

Total 65 74.98 109 107 112 116 119 124

Current Liabilities

l iabil ities against assets subject to lease 19 17.94 22 19 18 18 19 18

Finances under various arrangements 39 191 266 351 653 419 191 230

Creditors, accrued and other l iabilities 434 518 697 750 886 1,317 1,144 1,193

Total 492 726.11 984 1,120 1,557 1,754 1,354 1,441

Total Liabilities and Equities 2,569 2,864 3,285 3,717 4,435 5,427 5,045 5,436

Non- Current Assets

Property, plant and Equipment 209 231 232 245 229 213 197 193

Long Term Investments 546 569 568 593 618 643 668 693

Long Term Deposits 23 27 31 34 37 40 43 46

Total 777 827 831 872 884 896 907 932

Current Assets

Stock in Trade 50 59 101 131 228 203 213 224

Trade debts 1,352 1,499 1,838 2,033 2,631 3,364 2,880 3,024

Short term investments 200 181 156 176 176 176 256 286

Advances, deposits, prepayments, etc. 155 163 243 253 263 273 253 263

Cash and Bank 40 134 116 252 253 516 535 707

Total 1,797 2,037 2,454 2,844 3,551 4,531 4,137 4,504

Total Assets 2,575 2,864 3,285 3,716 4,435 5,427 5,045 5,436

*Calculated on current number of shares outstanding

10

Fresh Money

SECP Research Entity Notification Number: REP-040

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11

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• Relative Valuation (P/E, P/B, P/S etc.)

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Frequently Used Acronyms

TP Target Price DCF Discounted Cash Flows FCF Free Cash Flows

FCFE Free Cash Flows to Equity FCFF Free Cash Flows to Firm DDM Dividend Discount Model

SOTP Sum of the Parts P/E Price to Earnings ratio P/Bv Price to Book ratio

P/S Price to Sales EVA Economic Valued Added BVPS Book Value per Share

EPS Earnings per Share DPS Dividend per Share DY Dividend Yield

ROE Return on Equity ROA Return on Assets