Karachi, March 18, 2014 (PPI-OT): While NML posted strong results during 1HFY14 (EPS: PkR1O.96; +35%YoY), 2HFV14 results are expected to be sequentially lower due to lower core income on a stronger PKR as well as likely lower dividend income.
According to AKD Securities, these stand to counter the impact of anticipated higher `other income’ from loan to subsidiary. Together with a strong PKR, AKD Securities downward revises AKD Securities’ FV14F and FV15F EPS estimates to PkR1 8.67 (-1.88%) and PkR22.12 (-4.74%) which leads us to trim AKD Securities’ Jun’14 target price to PkR137.5lshare from PkR141.41share previously. That said, NML (FY14F PIE: 6.øx) remains AKD Securities’ preferred play in the Textile space given its relatively low sensitivity to cotton prices and strong portfolio income. In this regard, AKD Securities believes any weakness in share price, particularly on fresh PKR appreciation, should be taken as an opportunity to build positions in this quality name.
Corn earnings to be lower in 2HFY14… Spinning margins are expected to suffer during 2HFY14 due to declining yarn prices, higher cotton procurement rates this year vs. FY13 and the appreciation of the PKR vs. the US$, with margins for the remaining segments to also be impacted by the latter Although recent PKR strength may prove to be short-lived, its impact may manifest in 4QFY14. As a result, core earnings from textile operations are projected to decline to PKR4.64/share in 2HFY14 vs. PKR6.94/share in 1 HFY14. That said, dividends announced by NPL, PKGP, LPL and MCB will provide support to the bottom line, to the tune of PKR3.08/share in 2HFY14.
…But Other Income can surprise: Along with 1 HFY14 results, the company also announced plans to expand its spinning capacity by 28k spindles, taking total spinning capacity to almost 226k spindles. According to the company’s plans, NML intends to lease out the new unit to wholly owned subsidiary Nishat Spinning (Pvt.) Ltd for PKR2Smn/month which will result in rental income of PKRl98mn pa. for the parent (annualized EPS impact: PKRO.56). At the same time, plans to lend PKR1 .5bn to Nishat Power Limited (NPL) will result in further increase in `other income and result ii an EPS impact of PKRO.34. Finally, NML plans to increase its shareholding in MCB which could potentially increase the former’s dividend income by PKRO.35/share. While AKD Securities has incorporated the new spinning unit as well as loan to NPL in AKD Securities’ model, AKD Securities has not yet incorporated the impact of further acquisition of 7.98mn shares of MCB as timing remains uncertain.
Investment perspective: Following NML’s 1 HFY14 result and after incorporating the PKR’s recent strength, AKD Securities lowers AKD Securities’ FY14F and FY15F EPS estimates to PKR1 8.67 (-1.88%) and PKR22.1 2 (-4.74%) respectively, which leads us to trim AKD Securities’ Jun14 target price to PKR1 37.5/share from PKR141 .4/share previously. In this regard, while the exchange rate movement may have a magnified impact until the next cotton harvest season, margins should rationalize thereafter as major raw material costs also adjust to track the PKR/USS exchange rate. NML trades at a forward PIE of 6.9x where AKD Securities’ revised target price offers 7% upside (10% on total return basis).