By: BMA Capital Management Limited
We highlight Kohinoor Textile Mills Limited as a hidden gem within small cap scrips where our conviction on the stock is based on i) improving fundamentals in core operations and ii) impressive portfolio valuations. In this regard, the company holds 58.06% stake (306mn shares) in Maple Leaf Cement Factory (MLCF), benefiting from improving operations of the subsidiary.
The indicative TP of the stock is computed at PKR70/sh comprising of KTML textile operations valued at PKR27/sh plus portfolio valuation contributing PKR43/sh (assuming a portfolio discount of 30%). Note that KTML is not part of our actively covered textile universe. In CY14, Pakistan Textile sector has underperformed the benchmark KSE100 by 18% on account of unfavorable industry dynamics leading to decline in sector profitability.
However, CY15 is expected to fare better on account of i) ~26%YoY decline in cotton prices in FY15, ii) ~43%FYTD decline in prices of FO, iii) improved volumetric off-take on account of GSP+ and iv) easing finance cost on the back of declining interest rates. Materialization of the above mentioned triggers will remain the key valuation triggers, going forward. We expect the company to post unconsolidated EPS in the vicinity of PKR4.5-PKR5.0 in FY15.
Margins to improve on lower cotton: 1HFY15 was marked by a mild recovery in the industry’s core operations as the prices of cotton came off and the benefits of the GSP+started to materialize. In this regards, company’s top line posted a growth of 8%YoY (and 4%QoQ) while gross margins also remained robust at around 15% (BMA universe gross margins 13.9%).