AKD Quotidian about — NML: TP raised to PkR1OS/share

Karachi, March 20, 2013 (PPI-OT): Despite the 28.4% CYTD increase in the stock price of NML AKD Securities continues to see further upside potential, where AKD Securities discounted cash flow valuation leads us to AKD Securities revised Jun’13 TP of PkRI 08/share, offering upside of 32%%.

According to AKD Securities buy! NML posted impressive bottom-line growth in IHFYI3 as compared to IHFYI2 with NPAT growing by 50%YoY to PkR2.9bn (EPS: PkR 8.13), with growth underpinned by 238bps VoY expansion in Gross Margins (GMS) to 16.7%.

AKD Securities expects NML to post FYI3F NPAT of PkR5.5bn (EPS: PkRI5.71), up by 56%YoY. Continued bullish trend in cotton prices, weakening in the PkRIUS$ parity and dividend income from portfolio companies are likely to boost earnings in 2HFYI 3. Moreover emphasis on brand development i.e. Nishat Linen and reduction in energy costs (shift to alternatives like coal and bio-mass) are likely to be value accretive for the company in the long run.

NML 1HFY13 Result Review: NML posted impressive bottom-line growth in 1HFY13 as compared to 1HFY12 with NPAT growing by 50% to PkR2.9bn(EPS: PkRS.13) following a 238bps VoY expansion in GMs and revenue growth of 21.7%YoY to PkR26.3bn. Dividend income from subsidiaries continued to provide further support to the bottom-line. With the exception of Garments’, all the other segments experienced margin expansion in I RFY1 3. The most significant gainer in this regard was the spinning segment where gross margins improved from 11% to 16%. AKD Securities expects NML to post FY13F NPAT of PkR5.5bn ( PS: PkR15.71) vs an NPAT of PkR3.Sbn last year, with FY3F revenues clocking in at PkR54.gbn (+22%YoY).

Cotton rally to further lift 2HFY13 earnings: The continued bullish trend in cotton prices (COTLOOKA Index up 17.48%CY13TD) is another positive signal as the company has already booked cotton at favourable rates in 20FY13. With the subsequently increasing prices of yarn, NML is poised to reap the benefits of margin accretion in 2HFY13. Moreover impact of the EU AlP status is also likely to manifest in 2HFY13 as the trade preferences came into effect in niid-Dec12. NML, with its strong customer base in EU (29% of FY12 revenues) will be ideally placed to benefit from the EU GSP Plus status going forward.

Triggers: NML’s focus on developing its own high end brand `Nishat Linen’, with a particular focus on the domestic market will be value accretive in AKD Securities views. Home textile and designer fabrics being sold under the Nishat Linen label will help NML gain a foothold in the high-end retail clothing space.

NML is also planning to further diversify its investments and is looking to enter the foods market through its investment in Nishat Dairy (Pvt) Ltd. where the company is planning to set up a dairy farm with a capacity of 2500 animals. In the first phase the company plans to start operations with 1,500 animals which would be increased to 2,500 animals in the second stage.

Nishat Dairy will sell unprocessed milk to companies in the dairy segment. Moreover, NML’s focus on power generation through cheaper sources such as the electricity generation from coal and bio mass will reduce energy cost in the long run. In this regard, the first combined heat and power plant, with the capacity of 6MW of electricity and 65tons/hour of steam became operational in Dec’12.

Portfolio companies will continue to provide support to the bottom line of the company, where AKD Securities would like to particularly flag DGKC (314% shareholding), given the improving fundamentals of the cement sector. NML is also likely to benefit from further weakening in the PkR/US$ parity, both through its own export operations and through its dividend income from investment in IPPs (NPL, PKGP and Lalpir) whose returns are linked to the PkR/USS$ exchange rate.

Recommendation: NML is trading at a forward PIE multiple of 5.2x and a P/Bat O.6x. While the stock seems slightly pricey when compared to other textile companies, NML is still trading at a significant discount to the AKD universe FYi 3F PIE of 75x.

AKD Securities expect s the company to pay a dividend of PkR45/share in FY13 implying a dividend yield of 5.49%. Despite the 28.4% CYID increase in the stock price of NML AKD Securities continues to see further upside potential, where AKD Securities discounted cash flow valuation (previously S0TP) leads us to AKD Securities revised Jun’13 TP of PkR1 08/share offering attractive upside of 32%. Buy!.

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