CITI, 30 May 2008
Punj Lloyd, BUY
Auditor Qualification Mars Robust Headline Numbers
Buy/Low Risk 1L
Price (30 May 08) Rs320.85
Target price Rs493.00
Expected share price return 53.7%
Robust headline numbers — Recurring FY08 PAT at Rs3.21bn, up 63% YoY,
was 2% ahead of CIR estimates of Rs3.16bn. Reported PAT at Rs3.5bn was higher on account of sale of investments to the tune of Rs371mn in 3QFY08. Consolidated FY08 EBITDA margins at 8.3% were ahead of estimates at 7.6%. The company ended the year with an order backlog of Rs196bn, up 23% YoY.
Forex derivates MTM — The company reversed Rs218mn of forex derivative
gains recognized in the previous quarters in 4QFY08. At the end of FY08, the
company had forex derivative contracts with gains of Rs357mn on an MTM basis which has not been recognized, in line with ICAI standards.
Auditor qualification in FY08 accounts — Auditors have qualified the FY08 results, mentioning that the accounts do not provide for Rs3.0bn of losses on a long-term contract currently in progress (Simon Carves,
Legacy losses in 3QFY08 — In 3QFY08, Semb E&C booked losses of Rs680mn. Management had mentioned that they had been conservative and provided for the entire amount of losses on these orders even though some recoveries are possible. Punj had Rs10.3bn of legacy orders at the end of 3QFY08.
Valuation
Our target price of Rs493 is based on a target P/E multiple of 23x Dec09 for Semb + Punj, which is well supported by earnings CAGR of 45% over FY07- 10E and RoEs expanding from 17% in FY08E to 21% in FY10E. Our target multiple is at a 23% discount to that of L&T. Despite Punj Lloyd’s superior earnings CAGR of 45% over FY07-10E vis-à-vis that of 42% for L&T, we believe Punj Lloyd should trade at a discount to L&T given L&T’s superior order backlog, RoEs and execution capabilities. Further, we also value Punj Lloyd investments in a shipyard and a real estate JV at a P/BV of 2.3x
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