Morning Call about – Nishat Mills Limited Personal Goods – Arif Habib Limited

Karachi, February 12, 2014 (PPI-OT): Dividend income support to increase earnings by 50%QoQ!

Arif Habib Limited reiterates Arif Habib Limited’s ‘BUY’ stance on Nishat Mills Ltd (NML) with Jun’14 TP of PKR 158.6/share offering an upside of 18.2% (PEx 5.73 and PBx 0.77on FY14E).

According to Arif Habib Limited, going forward, Arif Habib Limited foresees attrition in core earnings of NML with GSP+ status impact on incremental EU export sales and capacity expansion of 28,800 spindles (at Feroze Wathan plant) to come in play.

2QFY14 EPS expected to clock in at PKR 6.71/share, up 50% QoQ

With NML scheduled to announce its result on 14th Feb’14, Arif Habib Limited expects earnings to jump 50%QoQ to clock in PKR 6.71/share in 2QFY14 (PKR 11.18/share in 1HFY14). This jump is expected mainly on account of a 66% rise in other income as the company will realize dividends from its associates. Arif Habib Limited expects NML to post a 38% YoY earnings growth in 1HFY14 to PKR 11.18/share compared to PKR 8.13/share in the same period last year.

Financial Highlights
PKR mn                    2QFY14E         1QFY14A       QoQ        1HFY14E     1HFY13A       YoY
Sales                      14,025         13,579         3%         27,604      26,317        5%
Gross Profit                2,904         2,499         16%          5,403       4,385       23%
Gross Margins               20.7%         18.4%         12%          19.6%       16.7%       17%
Other operating income      1,113         672           66%          1,785       1,394       28%
Profit from operations      2,842         2,136         33%          4,978       1,625      206%
Finance cost                  342         383          -11%            725         831      -13%
Profit after taxation       2,359         1,572         50%          3,931       2,858       38%
EPS: (PKR)                   6.71         4.47                       11.18        8.13
Source: Company accounts and Arif Habib Research

Stable cotton prices keeping core operating margins intact

Further to support core operating margins, cotton prices have remained relatively stable averaging around PKR 6,658/maund in 1QFY14 v/s PKR 6,646/maund in 2QFY14. Looking ahead, Arif Habib Limited does not see any major upswing in cotton prices, given stable local market supply.

Export sales to continue its increasing trend

Arif Habib Limited believes, NML (~3% export market share) will continue to show an increase in its export sales in 2QFY14 as witnessed in 1QFY14 by 6% YoY mainly due to a significant PKR to USD depreciation of 4% QoQ. This Arif Habib Limited believes will push up gross margins in 2QFY14 to 20.7% from 18.4% in 1QFY14.

Energy shortage and tariff hikes to have marginal impact

Unlike most Textile mills’ vulnerability to energy shortages and tariff hikes, NML is relatively immune from such factors as it can run captive powers in four of its mills through coal (30%) and alternative means mainly biogas (70%). We believe this will minimize the impact of rising fuel-power costs for NML.