For a firm that has such huge potential, and a just recently proven turn around, shareholders haven't been treating Thal Limited well. The stock has been on a downward journey for some time, and it seems there is no respite to it (see stock graph). Does Thal's stock deserve such bashing?
Thal has been operating under the umbrella group of the House of Habib since 1966. Ergo, the firm has strong business group behind it, and they are not newbies in the business world. Recall that the House of Habib already has equity as well as technical collaborations with a host of Japanese, European and American business names such as Toyota, Denso, Koito, Gabriel etc.
As for the company itself, it is a diversified business engaged in the manufacture of engineering products in Karachi, jute products in Muzaffargarh, laminate sheets in Hub and paper sacks in both Hub and Gadoon.
Realistically speaking, however, it is the engineering division that earns the most buck. For instance, engineering segment earned Rs 5.46 billion in the first half ended December 2015, a period during which the firm's total sales were Rs 6.9 billion. The segment produces automotive parts such as car air-conditioners, radiators, wiring systems and engine components.
The remaining 20 percent of the sales comes from the building material and allied products segments (read jute, laminate, and paper sacks), where jute leads the pack. Apart from these key business segments, Thal subsidiaries include renowned names such as Makro-Habib Pakistan Limited, Pakistan Industrial Aids (Private) Ltd, and Thal Boshoku Pakistan (Pvt) Ltd. Interestingly, a bulk of Thal's shares (44%) are held by foreign investors, who traditional market pundits classify as 'brown goras' - and of whom the lesser mortals at local exchange have little information about.
Recent financial performance
After the tough years of 2013 and 2014, Thal managed a sweet turnaround in 2015 when it posted a 34 percent growth in top line and 58 percent growth in net profit after taxes. The reason: the previous two years had seen auto assemblers facing difficulties in revenue growth, whereas 2015 saw auto sales kick off - a trend that has been continuing in the fiscal year to date. Since nearly 80 percent of Thal's revenues originate from engineering segment - that caters to auto sector - any swing in auto sector naturally affects the firm's top line.
In the fiscal year to date, Thal has continued to shine - operationally speaking. However, one-time hit on the firm's profit and loss account has made a dent in its earnings. According to its latest results, Thal saw a 20 percent growth in the second-quarter gross profits, which took the first half gross profits to Rs 1.5 billion - a growth of 42 percent year-on-year. This growth mainly came from engineering segment, whose sales rose 22 percent during the half year ending December 2015.
On top of it, Thal's other income grew substantially during the period. The firm had about Rs 4.1 billion worth of short term investments as of December 2015. These were parked in term deposits, government treasury bills and mutual funds - and the firm continues to earn decent sums under this head each year. In addition, the company has about Rs 4 billion as long term investments in a host of quoted and unquoted subsidiaries and associates, of which the biggest is in Habib Metro Private Limited. Returns from long term investment also contribute heavily to Thal's other income.
What really hit the firm in the ongoing fiscal year was a one-time charge it provisioned in the first quarter. It so happened that the Saddar (Karachi) store of Thal's subsidiary company Makro Habib Pakistan Limited (MHPL) was closed down on September 11, 2015 as a consequence of dismissal of the Review Petition by the Honourable Supreme Court of Pakistan.
Accordingly, the Operation Agreement with Metro Habib Cash & Carry Pakistan (Private) Limited (MHCCP) was terminated. Consequently, MHPL is required to pay Rs 792 million to MHCCP, on account of closure of Saddar store. And if MHPL fails to pay, Thal Limited had agreed to make the payment to MHCCP. In the second quarter, Thal booked a provision of Rs 598 million, since the balance of Rs 194 million has been arranged by MHPL. This Rs 598 million represents the bulge in the Thal's other charges in the ongoing financial year - and it is the main reason why Thal's bottom line hasn't grown in proportion to its top line.
Outlook
From revenue sense, the future looks positive for the firm. At the moment, it seems that the auto sales are set to grow from strength to strength in the years ahead, thanks to government demand (for example: Punjab taxi scheme), along with sustained private sector demand in an economic environment that is witnessing a depreciation of Japanese yen and low interest rates. Since this segment contributes about 80 percent of the firm's top line, the overall outlook for the firm looks positive.
The risk to the thesis is that the government policies are rather uncertain. There are risks of regularisation of smuggled vehicles, and relaxation for import of vehicles, whereas the much awaited Auto Industry Plan is being delayed month after month.
In the building and allied products segment, jute business is at risk as Bangladesh has banned jute exports as of November 2015, which was only briefly lifted to allow unshipped quantities to be exported against established LCs. But the firm is exploring options to expand its customer base, both locally and internationally.
With this segment, Thal is also considering the unsolicited indicative offer from Dynea Pakistan Limited that has expressed interest in acquiring the firm's laminates division. In other words, the impact from jute business will indeed be negative, but the firm can potentially use the money raised from laminates division sell off to help turnaround its jute business.
In addition, Thal continues to seek opportunities to diversify its businesses. Just recently, Thal has sought stake in Sindh Engro Coal Mining Company (SECMC). It has made an investment of Rs 360 million and plans for up to Rs 3 billion of investment in SECMC, which is expected to supply 3.8 million tonnes of coal to the mine mouth power plant. In the analyst briefing held this week; Thal's management said that the Rs 3 billion will be payable over a 42 months period following the financial close, which is seen materialising by the end of current month. Part of that money may be raised by selling the short term investments that the firm is sitting at.
If the Thal's core sales growth remains on the current trajectory, the investors are soon likely to forget about the jute blues and the one-time hit due to closure of Saddar shop.
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