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Karachi, January 10, 2013 (PPI-OT): Lalpir Power on footsteps of Pakgen Power!
The Board of Directors of Nishat Mills Limited (NML) approved yesterday a divestment of 15% of the company’s shareholding in Lalpir Power Limited through an Offer for Sale of shares, and consequently listing of Lalpir Power Limited on Karachi and Lahore stock exchanges.
According to Arif Habib Limited, a day earlier, NML’s peer company, Nishat Chunian Limited’s (NCL) Board of Directors had decided in principle to separate investment from textile business of the company and setting up a wholly-owned subsidiary in the U.S.A for effective marketing and trading of the export products. The Board seems to be concentrating more on the core business of the company i.e. textile, which Arif Habib Limited believes would yield a positive impact on company’s operations and thus share price going forward.
Lalpir divestment; what can be the outcome?
In today’s Morning Call, Arif Habib Limited would highlights the impact of foresaid divestment on the NML’s cash flows and earnings, as the gain from divestment is supposed to pass through the income statement (investment in Lalpir is classified as Available for Sale). Currently, NML has 110.5 million shares of Lalpir and it plans to take 16.57 million (15% of total 110.5 million) shares off the book. Investment in Lalpir appears to have a cost of PKR 1.82 billion in NML’s books (PKR 16.49/share). The impact of upcoming transaction is discussed in underlying table.
| Transaction assumption | PKR million | |||||
| Price (PKR/share) |
16.49 |
19.00 |
20.00 |
22.00 |
24.00 |
25.95 |
| Cash inflow |
273 |
315 |
331 |
365 |
398 |
430 |
| Per share inflow (PKR) |
0.78 |
0.90 |
0.94 |
1.04 |
1.13 |
1.22 |
| Gain on sale |
– |
42 |
58 |
91 |
124 |
157 |
| Gain per share (PKR) |
– |
0.12 |
0.17 |
0.26 |
0.35 |
0.45 |
| Source: Company accounts and Arif Habib Research | ||||||
Lalpir and Pakgen power, the two real comparables!
Lalpir Power Limited is quite comparable with Pakgen Power Limited because of the similar size and governing power policy. Further, both projects achieved CoD (commercial operations) by a mere difference of three months. Recall that Pakgen Power has been subject to similar transaction in Jun-11 at an offer price of PKR 19/share. Considering the improved dynamics of the market in general and power sector in particular, Arif Habib Limited foresee a price for the transaction between PKR 19/share and PKR 25.95/share (the value estimated by an independent valuer using Dividend Discount Valuation method).
Recommendation
Arif Habib Limited’s Jun-13 target price for NML based on SOTP methodology clocks in at PKR 79/share offering an upside potential of 27% from yesterday’s closing. NML’s portfolio contributes PKR 51/share towards the target price, on 40% discount to recent market prices. However, the impact of Lalpir transaction has not yet been taken into valuations, as Arif Habib Limited awaits further clarity regarding the sale price. Excluding that, 27% upside potential puts NML’s in Arif Habib Limited’s ‘BUY’ recommendation!