AKD Quotidian about — NML: Multifaceted growth – BUY maintained!

Karachi, November 14, 2012 (PPI-OT): NML has posted NPAT of PKR 1,063 million (EPS: PKR 3.02) in 1QFY13, up 3%YoY/6%QoQ. Importantly, flattish bottom-line was the result of lower divided income (down 60%QoQ) where bottomline was supported by improvement in core textile operations.

According to AKD Securities, sequentially, core profitability was driven by i) 4.4%QoQ increase in topline with significant increase booked in Home Textile (9.0%QoQ) and Weaving (5.2%QoQ) segments, and ii) 32%QoQ decrease in distribution cost. A notable improvement in 1QFY13 is the rebound in the profitability of spinning segment where gross margin expanded by 6.2pptQoQ on the back of strong cotton yarn demand from China (higher cotton prices and spike in labor cost has opened a window of opportunity for regional yarn exporters). By incorporating the promising outlook of core textile operations, AKD Securities raises AKD Securities’ FY13F EPS estimate by 13% to PKR 12.29 where positive impacts of i) Approval of Autonomous Trade Preferences (ATP), ii) Likely nomination for GSP plus, iii) Installation of 6MW combined heat and power plant, iv) Increased production of processing and home textile segment through synthetic natural gas plant, and iv) 20MW grid supply connection are key triggers for NML. Textile sector fundamentals remains positive while improving fundamentals of the portfolio companies, particularly DGKC, adds further gloss to AKD Securities’ outlook for NML. At current levels, AKD Securities recommends Buy on NML which is trading at undemanding FY13F P/E of 4.7x and offers 24% upside to AKD Securities’ Jun’13 TP of PKR 74/share.

1QFY13 Result Review and Outlook: NML has posted NPAT of PKR 1,063 million (EPS: PKR 3.02), up 3%YoY/6%QoQ, largely driven by uptick in core textile operations. Sequentially, earnings growth was supported by i) sales increase of 4.4%QoQ (higher sales of Processing and Home textile and Weaving segments) and ii) 32%QoQ decrease in distribution cost (lower ocean freight charges). Flattish bottomline was the result of lower dividend income from portfolio companies (down 60%QoQ) which dragged bottomline despite strong recovery in core income.

Summarized P and L

PKR (million)1QFY134QFYI2QoQ1QFY12YoY
SALES

12,955

12,411

4%

10,941

18%

GROSS PROFIT

2,039

1,969

4%

1,175

74%

S and A

820

1,076

-24%

702

17%

Finance cost

429

403

6%

451

-5%

Other income

470

308

53%

1,314

-64%

PAT

1,063

1,002

6%

1,031

3%

EPS (PKR)

3.02

2.85

2.93

Source: Company Reports and AKD Research

By incorporating sequential improvements from i) likely implementation of ATP package by the EU ii) rebound in home textile operations in 1QFY13 and iii) halving of GIDC, AKD Securities raises AKD Securities’ FY13F EPS estimate by 13% to PKR 12.29. AKD Securities has also raised AKD Securities’ SoP based Jun’13 TP by 4% to PKR 74/share to reflect improvement in textile operations and uptick in portfolio value. Beyond FY13F, nomination of GSP plus status (effective from Jan’14) and 20MW grid supply (annualized EPS impact of ~ PKR 0.57- PKR 0.90) will likely drive the core profitability of NML whereas strong dividend income stream is also expected to boost the bottomline.

Investment Perspective: Textile sector fundamentals remains positive while improving fundamentals of the portfolio companies, particularly DGKC, adds further gloss to AKD Securities’ outlook for NML. At current levels AKD Securities recommends a Buy Stance on NML which is trading at undemanding FY13F PIE of 4.7x and offers 24% upside to AKD Securities’ Jun’13 TP of PKR 74/share.

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