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Philip Morris Pakistan valuation

I used five years of financial statements to build forecasts and estimate the company’s value.

  • Excel
  • Financial statement analysis
  • Forecasting
  • CAPM
  • Valuation models
Key results
18 line itemsanalyzed and forecast, 10 from the balance sheet and 8 from the income statement
8.1% a yearsales growth from 2019 to 2023, PKR 13.3B to PKR 18.2B
0.69levered beta, from 57 monthly returns against the KSE-100
30.33 to 6.17earnings per share, 2022 to 2023
Findings & method

What I found

  • 2023 was a margin squeeze, not just a sales dip. Sales fell 8.2% to PKR 18.2B, but cost of sales rose from 55.2% to 66.3% of sales and distribution and marketing from 16.8% to 30.6%. After those two costs, 3.1% of sales was left, down from 28.1% in 2022.
  • The balance sheet changed shape. Stock in trade nearly doubled (PKR 6.1B to 12.0B) and trade and other payables more than tripled (PKR 4.3B to 13.5B). Cash grew from PKR 0.33B to PKR 9.06B, which the report links to asset disposals and withheld dividends.
  • Every forecast has named causes. Each line is a weighted sum of factors such as inflation, tobacco taxation, illicit trade, rupee devaluation, and the shift to reduced-risk products like IQOS and Zyn. I cross-checked against naive, 3-year moving average, and Excel forecasts.
  • Cost of equity: a levered beta of 0.69 (0.47 unlevered), a risk-free rate of 11.68%, and a mean monthly market return of -0.94% give a cost of equity of 2.95% and a WACC of 4.17%. Sustainable growth came out at 2.44% (100% retention times a 2.44% return on equity).
  • The valuation models disagreed. The accounting valuation and free cash flow models pointed to undervalued. The P/E model pointed to overvalued, with an actual leading P/E of 71.4 against an intrinsic 20.3. The dividend discount model did not apply, since no dividends were declared in 2023. The P/E result rests on thin 2023 earnings, while the other two rely on forecasts.

The company: an affiliate of Philip Morris International with one cigarette factory, one leaf-threshing plant, 15 sales offices, and 739 employees. Brands include Marlboro, Parliament, and L&M.

The 2023 squeeze, 2019 to 2023

How steady was each line?

Average error of a naive "same as last year" forecast, 2020 to 2023. Lower means a steadier line.

The backdrop the model had to explain

33.1% to 37%share of the cigarette market held by illicit trade, 2019 to 2020
200%+cumulative excise duty increase on cigarettes in fiscal 2022 to 2023
55% to 66%effective tax incidence on cigarettes after those increases
-20%sales volume in 2020, while sales revenue rose 24.5%

From the report, which cites industry and government sources. The company is 94% owned by Philip Morris International and competes with Pakistan Tobacco Company and with illicit and low-price brands.

Statement explorer: what moved, and why

Five years of reported figures. Pick a line to see the trend, the year-on-year change, and the drivers the report identifies.

Forecast builder: change a factor, see the 2024 forecast

These are the weighted-factor forecasts from the report, and the defaults reproduce its numbers. Edit any growth rate or weight.

Horizontal analysis   (this year - last year) / last year
Vertical analysis     line item / total assets (or sales)
Weighted forecast     next year = this year x (1 + sum of growth x weight)

Limits: the cost of equity of 2.95% reflects a negative average market return (-0.94% a month) over the 57-month window. A longer window or an estimated market premium would raise it and lower the intrinsic values.