Morning Call about Textile Sector of Pakistan – Arif Habib Limited

Karachi, December 26, 2013 (PPI-OT): GSP+ Status rejuvenates Textile’s Growth Potential!

According to Arif Habib Limited,

The following is an excerpt of Arif Habib Limited’s detailed report released on the Textile sector of Pakistan and the companies in Arif Habib Limited’s coverage.

Textile Sector; Main stay of the economy!
The textile sector has remained at the forefront of Pakistan’s economy for years although it accounted for only 9.5% of the GDP in FY13; the sector contributed a massive 58% (in FY13) to the total country’s exports. Total textile exports from Pakistan clocked in at USD 13.0bn in FY13 (~2% of global textile exports), from only USD 9.5bn in FY09 depicting at CAGR growth of 8%, which has helped the country bring in precious foreign reserves in the last few years.

On account favourable development on the recently awarded GSP+ Status by the EU Parliament to Pakistan, Arif Habib Limited has reviewed Arif Habib Limited’s case on the sector and Arif Habib Limited’s likeness towards coverage companies Nishat Chunian Limited (NCL) and Nishat Mills Limited (NML).

For Pakistan’s textile sector in general, and the spinning business in particular, FY13 has been a year of blessings. The key factors contributing towards the well being of Pakistan’s textile sector includes yarn demand from China and exports to European and US markets. Given the current scenario, the outlook for demand from these markets seems encouraging and, thus, the textile sector’s charm is expected to continue for FY14 as well. Factors to affect sector profitability the most include Cotton prices, fluctuation in local currency and interest rates.

Nishat Chunian Limited: Skewed towards massive outperformance!
Arif Habib Limited reiterates ‘BUY’ on NCL with a Jun-14 Sum of The Parts (SoTP) based price target of PKR 77.4/share for Jun’14 offering an upside of 34%. Arif Habib Limited’s likeness towards the scrip is based on projected earnings upside with a decent CAGR of 11% in the next 4 years.

The company has already experienced a turnaround in its profitability where earnings have grown by a CAGR of an astonishing 35% in the past three years. Capacity expansion of additional spindles, lower leveraging and power projects in the pipeline in reducing massive fuel and power costs will further unlock the potential of NCL going further.

Nishat Mills Limited: It’s never too late!
Using Arif Habib Limited’s Sum of the Parts-based methodology, Arif Habib Limited works out NML to have a Jun- 14 target price of PKR 159/share (upside 24%) recommending a ‘BUY’ at these levels. Arif Habib Limited expects NML to post 4-year earnings CAGR of a straight 19.6% with significant improvements in net margins going forward, from 11% in FY13, to forecasted net margins of 16% in FY15. With significant out-reach in European Markets to be further un-locked through granting of the GSP+ Status to Pakistan, coal and other alternative fuel mixes achieving fuel cost efficiencies and significant support of dividends incomes from associate companies, the scrip remains a textile favorite.

Textile Universe Forward (FY14) Estimates
Scrip   PE     PB    DY   ROE  Target  Upside   Recommendation
NCL    4.05   1.45   7%   32%   77.4    34%          BUY
NML    5.41   0.76   4%   12%  159.0    24%          BUY
Source: Company Accounts and AHL Research