Roshan Packages share price depreciates 14pc over 22 sessions

Was the strike price of Rs86.25 really an overvaluation?

Roshan Packages Limited’s share price depreciated to Rs70.56 earlier today, thus aligning in the range analysts had initially predicted for the stock when it was listed in Pakistan Stock Exchange in January.

The listing of the flexible packaging and corrugated cartons manufacturer was the first Initial Public Offering (IPO) of the year and contrary to market expectations of Rs50-Rs70 offering price, the company received a strike price of Rs86.25 which was more than double of its floor price of Rs35.

The stock was oversubscribed by 6.8 times, according to a bourse filing by Arif Habib Limited, book-runner for the IPO. As a result, the company was able to raise over Rs2 billion against the target (issue size) of Rs850 million or 24 million shares from high-net-worth investors – individuals, investment companies, mutual funds who placed a minimum bid of Rs1 million each.

Ahead of the book building process, most analysts gave subscription calls for Rs50 to Rs60 and expected a final price of no more than Rs70. However, there were some exceptions as very few analysts had expected it to go even higher because of the company’s strong financial history and bright growth prospects.

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“I wouldn’t be surprised if it achieved a strike price of Rs90, considering an EPS of Rs5 to 6 next year, positive investment climate and liquidity gush,” said Zeeshan Afzal, Executive Director Research at Insight Securities, at the time.

Immediately after the IPO – which Profit also covered – a debate whether the share was overvalued started between the investors as the final price was much higher than the highest estimate of most brokerage houses.

The stock started trading on February 28, and since then the share price has depreciated by 14pc in the 22 trading sessions. As many as 15 million shares of the company have been traded so far.

On Thursday, in RPL’s half yearly result, the company posted a decline of 9pc in profit for the second quarter 2015; settling at Rs74 million (EPS: Rs0.99) from Rs80 million (EPS: Rs1.08) it earned in the second quarter of 2015. According to analysts, the earning per share will further dilute once its is divided between the current 107 million shares against outstanding 75 million shares as of December 31, 2016.

Sequentially, the profit for the half year clocked in at Rs157 million, against Rs117 million of 2015 (up 35pc YoY). Following the result, the stock closed at Rs74.26.

However, on the beginning of the trading today (Friday), the stock opened at Rs70.56 which later managed to ascend to close at Rs72 – the lowest ever closing price for the stock.

However, CEO Roshan Packages Limited Tayyab Aijaz does not feel that the result impacted his company’s performance; instead, he is positive on the 35pc YoY increase in July-Dec period. While talking to Profit, the CEO said, “If you compare with the previous half-yearly [result], sales have increased, profitability is also better but since new units have been installed, there’s an increase in the depreciation cost which has pressurised the numbers [QoQ result].”

“We are still following our historical trends,” he said regarding the strong financial history on the back of which the company received an overwhelming response in the IPO.

“Since the market overall is in pressure and sentiments are down, there might be some impact of that but our numbers are good. When you buy new machinery, there comes a depreciation cost, but of course units [product] are not sold right away. Since we have added new machinery, it will take some time to consume the depreciation cost,” he explained the reason behind QoQ decline.

While talking about the outlook, Aijaz said, “Our expansion is going as per promise; the new machines and units have been installed, we are running trials for corrugation and we are materialising the expansion we did.” He further added, “We are preparing to increase sales of the next quarter now,” to conclude.

Explaining Thursday’s result, Zeeshan Afzal said, “There were people who bought RPL considering the recent gains in almost all IPOs; these people had a plan of making small profits quickly and then selling out. However, since the share price depreciated – instead of appreciating from Rs86.25 – such investors’ patience ran out and they decided to sell off. I still believe that long term investors are interested in buying this stock when it further depreciates and then make a profit on their investments as the company starts to gain on its expansion.”

However, Afzal still believes that RPL’s is potentially a profitable stock in the longer run once the investments translate into earnings. While talking to Profit, the analyst said, “There might be some impact of the result on investors who were expecting ‘a very good result’, but the overall the stock’s price will go up (in the longer run) once the ongoing expansion plans are monetized and the investors see the multiples increasing, which will stay on the low side for a little while.”

“Maybe, I say maybe, it was overvalued but since there was a lot of liquidity in the market and the stock is indirectly related to consumer goods sector (for being a packaging supplier), I still say I was anticipating the higher side strike price which RPL got,” Afzal repeated his stance to Profit.

On the other hand, Adnan Sami Sheikh, an analyst at Topline Research – who previously regarded the IPO as overvalued – said, “The result has impacted the stock’s performance, however, at the current price of Rs72 and half yearly result of Rs157 million, the current PE of RPL stands at 24, which is again higher than the average 16-20 of the paper and board sector.” Packages Limited, Cherat Packaging Limited and Tri-Pack Films Limited have PE multiples of 16, 12.2 and 12 respectively.

To give a similar example of higher valuation case, the analyst said, “Al-Shaheer was oversubscribed at a strike price of Rs95 against a floor price of Rs43; it is now trading at Rs60 per share with a negative return of around 25pc since its listing of August 2015.”

Responding to a question, Sheikh said the expansion would take some time to become operational and “for it to reflect in earnings growth, maybe, the high valuation would be justified a couple of years down the line, but not right now.” As of right now, Sheikh believes that the stock would be settled between Rs70-Rs75, that too if the market overall performs well and a positive sentiment is built for Roshan Packages Limited.


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Aisha Arshad
The writer is a business reporter at Pakistan today. She can be emailed at [email protected]
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