By: Sarfaraz Abid, Global Securities Pakistan Ltd.
Textile operations remain low, earnings intact!
Slowdown in textile operation amid declining cotton prices and rising manufacturing cost has resulted in lower core textile profit for Nishat Mills Ltd. Total textile exports, as per PBS data, declined by 9.4% YoY in 9mo FY12 while the same declined by 15.6% YoY in terms of quantity, with exception to raw cotton. Hence, decline in cotton prices led to lower product prices while inventory losses due to expensive buying resulted in lower core textile profit, down by 32% YoY to PKR 2.36bn in 9mo FY12.
Nishat Mills Ltd’s reported earnings clocked in lower against our expectation, primarily due to higher raw material cost and fuel charges, while other income clocked in lower than our estimation. We keep our full year earnings intact at PKR 10.77/share for FY12 as we remain optimistic on sales and margins for 4Q FY12. During the remaining part of the year, we project margins from spinning segment will continue to stay subdued, while nominal decline is expected in the weaving segment. However, we believe home textile will outshine with additional capacity and creation of newer market for the company’s product base. As per guidance, cotton procurement was completed at ~PKR 5,200-5,300/maund for the remaining part of the year while we remain concerned about prices for next year. However, with cotton prices at PKR 6,300/maund and increase in yarn prices we will see the benefit of higher margins in 4Q FY12. We see fuel cost and adverse movement in cotton prices as a key threat to our estimated earnings. Subsequently, our gross margin expectation for FY12 stands at 15.8%.
We maintain our Jun12 TP at PKR 67/share and recommend BUY on the scrip. NML’s market price has improved by 35%, rallying in tandem with its portfolio, while the broader market went up by 27% since Jan12. We highlight that price movement in portfolio investment has resulted in improving the stock price, while increase in cotton prices by PKR 1,000/maund since start of 4Q FY12 will improve core profitability. Moreover, improved margins and increase in dividend income will also improve profitability in 4Q FY12. NML is trading at a forward P/E and P/BV of 5.17x and 0.51x respectively and offers 21% upside to our price target.
3Q FY12 witnessed higher energy cost
Nishat Mills Ltd. posted a substantial decline in profitability in 3Q FY12, down by 56% YoY to PKR 624mn (EPS PKR 1.78). Massive surge in fuel cost despite decline in raw material and yarn purchase cost affected gross margin of the company. Moreover, continued economic turmoil in EU and US has hurt the export market, though newer markets have provided some respite on that front. In addition, decline in cotton prices also affected gross margin, down to 15.9% from 18.2% in 3Q FY11. Cotton prices touched it’s highest, averaging at PKR 11,348/maund in 3Q FY11 while declining by 52% YoY to PKR 5,496/maund in the period under review.
Dividends from MCB and other recurring income remains strong
Other income was recorded at 36% YoY lower to PKR 306mn in 3Q FY12, where the company only recorded dividend from its associate –MCB- along with other recurring income. The same also clocked in lower than our estimates as actual result does not incorporate dividend from NPL, while contrary to markets expectation we did not expect contribution from PKGP in the respective quarter.
During 4Q FY12, Nishat Mills Ltd. will largely benefit from dividend income from its associated and subsidiary companies -PKGP of PKR 166mn, NPL of PKR 181mn, MCB of PKR 194mn-, which is expected to the tune of PKR 677mn, translating into an after tax EPS impact of PKR 1.78.