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Hot Stocks: Dolmen City REIT (DCR)

Hot Stocks: Dolmen City REIT (DCR)

Hot Stocks: Dolmen City REIT (DCR)
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Dolmen City REIT (DCR) has been showing signs of recovery after the pandemic phase with the improvement in footfall in recent months. However, the activity has not reached to pre-pandemic levels, as yet.

Nonetheless, the REIT has kept its absolute payout unchanged in the last two years, despite concessions offered to tenants, maintaining the stock’s dividend/yield in the double-digit region.

“Relaxed limits by regulators for the financial institutions to invest in REITs will continue to expand the REIT sector, at large, in the country, where at least six new REITs are already expected in the near-term,” Muhammad Waqas at JS Global Capital said.

Before the opening up of economic activity, Dolmen City REIT (DCR) is on the trajectory of revival with its average daily footfall at Dolmen Mall (Clifton), reaching up to 22k, shared by the company’s management in a briefing session.

The footfall is still below the average one, compared with the pre-Covid period of 32k. The REIT’s fund size has now reached Rs57.4 billion as of September 2020/21, while the company’s net asset value (NAV) stands at Rs25.82/unit. The occupancy level in FY21 was at 96.2 per cent/91.5 per cent for Dolmen Mall Corporation/The Harbor Front, respectively.

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According to the management, DCR holds a prime real asset at a key location in the city and caters to a specific target audience. It doesn’t expect any significant threat from the upcoming competition in retail space within the neighbourhood.

DCR posted a profit-after-tax of Rs8.6 billion (EPS: Rs3.9) in FY21, compared with a profit of Rs8.1 billion (EPS: Rs3.6), a 6 per cent increase, while in the first quarter of FY22, the company witnessed sales growth of 31 per cent YoY and posted a bottom-line of Rs706 million (EPS: Rs0.3), a massive 32 per cent YoY increase due to low base effect.

Despite drop in income, owing to concessions offered to tenants during the pandemic phase, the company maintained its payout ratio above 100 per cent.

Key incentives by the State Bank of Pakistan (SBP) and the Federal Board of Revenue (FBR) coupled with the government’s keen focus on real estate development to boost the construction sector are expected to play an important role in bringing REITs into the limelight.

At least six new REITs are expected in the near-term. A few months ago, the central bank also amended its capital adequacy regulations for the banks and DFI’s investment in REITs by significantly reducing its applicable risk weighted assets from 200 per cent to 100 per cent.

Earlier, the SBP had also amended certain provisions of its existing prudential regulations for corporate and commercial banks to encourage investment in REITs by enabling the institutions to make investments in REITs worth 15 per cent of their equity as opposed to the previous limit of 10 per cent.

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According to the company management, the REIT plans to invest in the middle-income areas such as Surjani Town and Naya Nazimabad under the newly-launched REITs. Moreover, the launch of new REITs to invest in other cities are also in the pipeline.

Searle Company Limited

The Searle Company Limited (SEARL) is all geared up to expand its top-line in the coming year through increase in export footprint and volumetric growth.

The company expects profit contribution from OBS Pharma to double in FY22, while its initial public offering (IPO) is expected by February 2022.

SEARL is one of the fastest growing pharmaceutical companies in the country and is ranked second in the industry in terms of volume with a market share of 6.35 per cent and fifth in value terms (market share 5.53 per cent).

Over the last year, the company has made several acquisitions in the pharma sector, with the recent major acquisition being OBS Pakistan (Private) Limited. The management believe that recent efforts would result in a 7 per cent YoY volumetric growth in the ongoing year.

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The management, in its corporate briefing session, apprised that the second quarter of FY22 would reflect the impact of the Consumer Price Index (CPI) adjustment in prices.

Moreover, the impact of the rupee depreciation has been broadly covered till the rupee/dollar parity of 180, any further devaluation; however, will negatively impact the company margins.

In addition, the company faced dampened export sales of 10 per cent of the overall sales during the last fiscal year due to dull exports to Afghanistan. The management expects the situation to improve, going forward.

The company also plans to increase its export footprint to seven new markets in the future, taking the company from the existing 15 avenues to 22.

Where profit contribution from OBS Pharma in FY21 was Rs533 million, the company expects this contribution to double to Rs1 billion in FY22 from the segment. The IPO of OBS Pharma is expected by February 2022. On the toll manufacturing of Reckitt Benckiser, the management expressed the hope that it will commence in a year’s time.

Essential and non-essential drugs in the portfolio are 80 per cent and 20 per cent, respectively.

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Engro Fertilizer

With gas price increment being long overdue, coupled with the recent International Monetary Fund (IMF) demand to hike the gas and electricity prices, an increase of 15 per cent to 20 per cent in the near-term is now likely. The last gas price increase for the sector was announced in July 2019; whereby, the price for feed gas had increased 62 per cent (Rs115/mmbtu), while for fuel the increase was 31 per cent, Rs241/mmbtu).

At present, the fertiliser plants that are operating on the Fertiliser Policy 2001, are charged Rs302/mmbtu for feedstock and Rs1,023/mmbtu for fuel stock.

Engro Fertiliser’s Enven’s concessionary feed gas rate arrangement of $0.7/mmbtu has expired by July 2021. Nonetheless, EFERT’s concessionary period is under dispute, at the moment, as the company faced significant gas outages at the start of the 10-year arrangement.

The company has begun to accrue gas costs at regular rates on prudence basis since the third quarter of CY21.

In a scenario analysis, gas prices increase 15 per cent for feed (Rs45/mmbtu) and fuel (Rs154/mmbtu). Engro Fertiliser would need price increments of Rs75/bag. The 70 per cent of the feed gas used by EFERT’s base plant is charged at the Petroleum Policy 2012 rates; hence, the lower per bag price increase required.

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On the flipside, since EFERT’s price on the portion is contingent on global oil prices, it will continue to get impacted in a rising oil price scenario.

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