AKD Quotidian about — NML – Best of both worlds

Karachi, June 05, 2013 (PPI-OT): AKD Securities rolls forward financial model for NML to FYI4F and raise AKD Securities TP by 21.3% to PkRI3I/share.

According to AKD Securities goings forward, continued demand for yarn from China will reduce sales risk in the spinning segment and bolster sales, while NML.’s attempts at improving supply chain management by increased direct contact with leading retail brands in the international market and expanding retail outlets of the Nishat Linen brand will likely add value to the higher value added segments of NML.

The expansion and modernization plans along with attempts to mitigate the impact of the energy crisis and the focus on higher value added products should be value accretive in the long run, in AKD Securities views. In this regard, AKD Securities Jun’14 TP of PkRl3lIshare provides an upside of 26% from current levels, Buy!

Demand from China: China is expected to continue providing demand for yarn on relatively high domestic cotton prices and a secular shift towards higher value added products. In this regard, cotton prices, which fell in late May recovered recently to Usd91.5/lb as fears of a slowdown in demand from China eased. This continued demand for yarn will likely reduce sales risk in the spinning segment.

Improving supply chain: The company in a bid to cut out middle men and increase business in the EU and US in the high end retail segment is now doing business directly with retail outlets. Moreover, regarding the Nishat Linen brand, Nishat Group Chairman Mr. Mian Muhammad Mansha in a recent interview stated that the company is planning to expand retail outlets from 60 to 200 to cater to increased demand. The coiripany is positioning itself to reap significant benefits from the EU GSP Plus status, expected to be granted in Jan’14.

Expansion and Modernization Plans: NML is in the process of up gradation and capacity expansions in the higher value added divisions. In this regard, the company is already in the process of migrating to newer looms in the weaving division and also plans to increase capacity by adding an additional 100 looms.

Moreover, the company also plans on increasing capacity in the stitching and processing segments to be able to cater to increasing demand for the Home Textiles and Processing segments as well as expected increase in demand from the Garments segment. The Combined Heat Power (CHP) Plant project is in the second stage where NML is planning to double the capacity of the CHP Plant. The fuel cost saving will lead to margin expansion in the long run.

Portfolio Income: The recent price performance of portfolio companies is likely to provide liripetus for further upside in NML’s price in AKD Securities views. However, in this regard AKD Securities would advise caution as valuations for MCB (forms -50% of NML’s listed porllolio value) seem stretched.

That said, dividend income from portfolio companies will continue to provide additional support to the bottom-line. Furthermore, the expected IPO for Lalpir Power Ltd. will increase the value of the publicly traded portfolio of NML, where the book value of Lalpir Power on NMLs books is PkR1 6/share.

Valuation: AKD Securities rolls forward AKD Securities financials model for NML to FY14F and raise AKD Securities TP by 21.3% to PkR1 31/share. In this regard, AKD Securities has reduced AKD Securities expectations for FY13F slightly (EPS: PkR14.5) given the below line result for 3QFY13.

However, the expansion and modernization plans along with the attempts to mitigate the impact of the energy crisis and the focus on higher value added products will be value accretive in the long run, in AKD Securities views. In this regard AKD Securities Jun14 TP of PkR1 31/share provides an upside of 26% from current levels, Buy!

Profit and Ions Account

(In PORmo)              FYIIA      F412A    FYI3F    FYI3F    FYI5F

 Net Sales             48,565     44,924   52,401   59,343   64,393
 COGS                  40,719     38,135   43,420   49,176   53,120
 Gross Profit           7,846      6,789    8,982   10,167   21,273
 Operating Exp          2,847      3,287    3,816    4,322    4,690
 Operating Profit       4,999      3,502    5,165    5,845    6,584
 Other Income           2,445      2,684    2,779    3,067    3,243
 Other Charges            431        344      371      421      456
 Financial Charges      1,601      1,761    1,738    1,409    1,134
 NPBT                   5,412      4,082    5,835    7,083    8,236
 Taxation                 568        553      731      829      895
 NPAT                   4,844      3,529    5,104    6,254    7,341
 EPS(PKR)               13.78      10.04    14.52    17.79    20.88
 PIE )x)                 4.11       4.77     7.16     5.85     4.98
 P/BVS (x)               0.56       0.45     0.72     0.66     0.60

 Source: AKD Research