AKD Quotidian about — NCL – Taj Textile acquisition and TP upgrade

Karachi, July 23, 2013 (PPI-OT): Following the recent decision of the Lahore High Court declaring the bid by NCL for the acquisition of the spinning units of Taj Textile Mills Limited successful, AKD Securities has revised AKD Securities earnings estimates and AKD Securities TP for NCL.

According to AKD Securities in this regard, accounting for a lower Discount Rate and increased spinning capacity results in an upward revision of AKD Securities EPS estimates by -15% across AKD Securities forecasts horizon where AKD Securities revised Dec’13 TP of PkR80.7/share provides an upside of 18% from current levels indicating an “Accumulate” stance. Furthermore, AKD Securities expects 4QFYI3 profitability to stand at PkR536mn (EPS: PkR2.95), taking full year earnings to PkR2,295mn (EPS: PkR12.41), up 223%YoY.

The Event: The Lahore High Court has finally approved the bid by NCL for the acquisition of the spinning units of Taj Textile Mills (TTM). The reserve price for the auction was set at PkR350mn where NCL was the sole bidder. The acquisition will result in an addition of around 47k spindles which is almost one third NCL’s current spinning capacity.

As per AKD Securities discussion with management the newly acquired units will become operational by the end of 1QFY14 or the start of 2QFY14 after refurbishment of the spinning units. The acquisition of 47k spindles coupled with the organic capacity expansion of 22k spindles will increase NCL’s total spinning capacity to -219k spindles, making it one of the largest yarn manufacturers in the country surpassing NML (spinning capacity of 198k spindles).

Incorporating the increase in spinning capacity, AKD Securities EPS estimates increase by -15% across AKD Securities forecasts horizon. In this regard the annualized revenue impact of TTM comes out to ~-PkR6bn.

4QFYI3 Result Preview: AKD Securities has tweaked estimates for 4QFY13. In this regard, AKD Securities expects NCL to post NPAT of PkR536mn (EPS: PkR2.95) for the quarter ended Jun 3013, which would be a decline of 27%QoQ.

The sequential decline earnings is primarily due to the lack of dividend income from the power subsidiary NCPL. For full year FY13, NCL’s earnings are forecast to grow by 223%YoY to PkR2,2SQmn (EPS: PkR1241). AKD Securities expects a final cash dividend of PkR3.00/share with the result.

Change in China’s cotton policy on the horizon: News coming out of China indicates that the Chinese cotton reserve policy may not be in force for the next cotton season following lobbying by textile mills for direct subsidies to farmers rather than a high cotton support price. Possible implications could include a significant reduction in the demand for yarn from China.

This presents a downside risk for NCL where the significant expansion in capacity may leave it exposed to a higher sales risk. Management has however expressed confidence that it will not face a high level of sales risk though margin attrition may be a possibility considering competition from Chinese yarn manufacturers. Recall, a 1% decline in AKD Securities cottons price assumption will reduce AKD Securities earnings estimates for NCL by 0.6%.

Investment Perspective: The scrip is currently trading at a FY14F PIE of 4.19x. AKD Securities revised Dec’13 TP of PkR80.7/share offers an upside of 18% from current levels indicating an `Accumulate” stance on the scrip.

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