Haseeb Waqas Sugar Mills: Test Case
Haseeb Waqas Sugar Mills Limited (HWQS), incorporated in 1992, and
bearing losses since the past 4 years now appears to be a game changer
due to factory’s location change. In the recent 9M report for the period
ended June 30, 2016, the company notified that it has relocated its mill
from Nankana Sahib, Central Punjab to Muzaffargarh, Southern Punjab.
This news has appreciated the scrip by 122% from August 1, 2016 to date,
and we believe that the rising trend shall persist in the future since
currently it is an undervalued stock based on numerous reasons below we
Relocation; adding benefit to the company
In the company’s recent 9M report, there appears a decline in recovery
rate of 0.66% (8% vs. 8.66% in CPLY) which we attribute to lower capacity
utilization and lesser number of working days (80 days vs. 97 days). In
MY15, the firm reported a capacity utilization rate in processed cane of
28.27% vs. 50.01% in the same period last year, and a rate of 28.17% vs.
49.94% in sugar.
During 9MMY16, the company reports an LPS of PkR19 vs. PkR18 CPLY,
which we believe was due to lower sales volumes because of low recovery
rate and an increase in finance cost by 13%. The company has obtained a
loan of PkR600mn from Silk Bank Ltd that has increased the Debt to Equity
ratio of the company to 1.41x with total debt of PkR2.83bn as of June 30,
2016, (mentioned in financial accounts).
In the company’s recent report, officials have reported its forecast for the
next 3 years, on the basis of which we have run a sensitivity analysis with
different recovery rates and its impact on the profitability of the company
for MY17 as follows:
We believe that the company is going to exhibit sucrose recovery rate of
11% post-relocation to Muzaffargarh, where the neighboring sugar mills
(JDWS and ADAMS) have an average yield of 10.75%. Using this rate, we
have forecasted future financials.
Recovery Rate 8% 9% 10% 11%
EPS/LPS (2017) (27.32) (16.65) (5.97) 4.71
Source: Shajar Research
Sensitivity Analysis (Recovery Rate and EPS)
Projections (provided by the company) 2017 2018 2019
Sugar cane curshing MT 651,000 672,000 700,000
Sugar cane rates/kg 215 230 240
Sugar Price/KG 60 62 64
Source: Company Accounts
The firm is currently in losses with a negative equity, therefore P/E and P/B are not suitable
measures for valuation. Being optimistic that the company will record earnings in the future,
we have run a sensitivity analysis on varying P/E multiples showing an upside potential in
Sept’17TP with underlying positive earnings of the company (MY17E EPS 4.71), as shown
We shall be releasing a detailed report after the announcement of annual accounts of MY16.
Since the announcement of relocation (August 1, 2016), the stock price has appreciated by
122% to date with huge participation by investors’ attention as it has generated turnover of
762,804 shares within a month as compared to 3 months of 577,076 shares and 12 months
of 179,579 shares respectively. Currently, the stock is trading at PkR11.33 and the sector
P/S(x) stands at 0.54 which makes it an undervalued stock. We believe that the scrip has a
potency to rise by 29% on the basis of lower P/S(x) of 0.42 (9MMY16).