Morning Call about – Initiating Coverage on NCL: Still time to be on-board – Arif Habib Limited

Karachi, May 30, 2013 (PPI-OT): Nishat Chunian Limited; Still time to be on-board! Arif Habib Limited initiates active coverage on Nishat Chunian Limited (NCL) with a BUY recommendation.

According to Arif Habib Limited likeness towards the scrip is based upon its gigantic earnings growth in FY13 where the bottom-line is anticipated to clock in at PKR 2,150mn. The net profit translates into EPS of PKR 11.81 depicting three times jump from adjusted EPS of PKR 3.84 for FY12. The main reasons behind improved profitability are as follows:

a) Spinning division dominating the ‘swing’ in profitability
The spinning business has proved a fortune-changer for the company so far this year. As far as profitability is concerned, NCL’s gross margins for spinning division in 9MFY13 improved massively to 20%, from 13% in similar period last year, due to increase in yarn prices (7.5% YoY) with expectedly better volumes in 9MFY13.

As a result, the overall gross margins of the company witnessed a 6pps improvement to 16.4% in 9MFY13, from 10.5%. Arif Habib Limited believes the sustained demand of textile products from local and international market will continue to put NCL on the track of rising profitability, being the basis of Arif Habib Limited growing’s earnings expectations.

b) Dividend income from NCPL proving to be icing on the cake!
NCL recorded a dividend income of PKR 750mn from its subsidiary, Nishat Chunian Power Limited (NCPL), during 9MFY13.

It is worth noting here that, NCL has incorporated the interim cash dividend of PKR 2/share from NCPL in 3QFY13 financial results and, the last quarter of current fiscal year should represent only the core business of company. The last quarter earning based on core business is expected to stand at PKR 2.34/hare, taking total earnings to PKR 11.81/share for FY13. Arif Habib Limited expects a further 9% YoY growth in company’s bottom-line in FY14.

Financial Highlights
PKR mn                        FY12A    FY13E     YoY   FY14F     YoY
Sales                         18,617   20,808    12%   22,484    8%
COGS                          16,540   17,400     5%   18,748    8%
Gross profit                   2,077    3,409    64%    3,736   10%	
Gross margin                  11.16%   16.38%  5.23%   16.62% 0.24%
Distribution expenses            500      559    12%      604    8%
Other operating income           857    1,032    21%    1,017   -1%
Profit from operations         2,247    3,614    61%    3,867    7%
Finance cost                   1,353    1,247    -8%    1,291    4%
Profit before taxation           894    2,367   165%    2,576    9%
Profit after taxation            699    2,150   207%    2,341    9%
EPS Adjusted (PKR)              3.84    11.81   207%    12.86    9%
Cash dividend/share (PKR)       2.00     4.00   4.50 

Sources; Company Accounts and AHL Research

Different projects in the pipeline!
NCL has been working on different projects pointing the growth of the company. The construction of 14MW grid station has been completed and the construction of source feed line by LESCO is under progress. The project (expected to be available by the commencement of FY14) will help the company bring down abnormally increasing fuel costs (already up by a huge 24% YoY in 9MFY13).

Moreover, NCL has also planned to increase number of spindles by 22,000 to 171,948 spindles. This expansion will lead to increase in company’s Yarn production capacity by 7.05mn KGs to 55.06mn KGs assuming new spindles produce 320 KGs of yarn per spindle. This project is in addition to the acquisition of spinning assets of Taj Textile, the matter eyeing final order by the High Court.

Outlook and risks
Given the current textile scenario, NCL seems to have a smooth sail up ahead; uncertainties regarding demand from China pose a threat though. The company has significant exposure to exports (contributing approximately 70% of the total sales) and demand from international market will be the factor in the driving seat.

Currently, Asia and USA are two major regions for NCL products, but positive development towards the grant of GSP-Plus Status by the European Commission to Pakistan will help NCL penetrate in European markets as well. Moreover, export oriented activities not only help NCL reach wide categories of end users but also provide opportunity to take advantage of depreciation in the PKR/USD parity.

Any upward reversal in interest rates, however, will swell NCL’s finance cost as the company has significant loans in the form of short-term borrowings as well as loan term loans (current debt-equity at 1.61x).

Arif Habib Limited sums of the parts (SoTP) based financial model values NCL to PKR 72/share at Dec-13. The scrip is trading at a highly attractive forward PE multiples of 4.6x and 4.2x on FY13E and FY14F earnings, respectively, offering a significant upside potential of 31% from last closing.

Following strong cash generation, Arif Habib Limited expects the company to announce a cash dividend of PKR 4.0/share for FY13 (dividend yield 7%) compared with PKR 2.0/share in FY12 (10% stock bonus was also distributed). Thus, Arif Habib Limited recommends a ‘BUY’ on NCL!

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