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NML by Foundation
NML by Foundation
PAKISTAN
17 January 2011
Inside
Core earnings to remain healthy despite expected dip beyond FY11 During the last two years, NMLs core earnings have shown stratospheric growth (expected CAGR 79.4%), driven by a significant improvement in gross margins due to early procurement of raw cotton at lower rates and continuous increase in prices along the cotton chain. Though we expect core earnings to remain restrained during FY12-13 as margins normalize to historical 16-17% from 21% at present, underlying profits would still be very healthy vis--vis current multiples. Strong dividend income to support companys bottom-line NML has a sizable portfolio investment in its group companies with a current value of PKR24bn (PKR68/share). Dividend income from investment portfolio has always provided a cushion against volatile gross margins of textile business. However, with recent investments in low risk high yielding IPP business (NPL and AES acquisitions) starting to bear fruit, dividend income should show strong growth from FY11 onwards. The above will result in further stability and diversification in income. Key beneficiary of any future policy incentives/trade concessions Though Textile Policy announced last year with much fanfare did not lift off the ground due to governments fiscal constraints and proposed post-flood EU trade concessions were rejected by WTO, we believe all is not lost for the textile sector, given its importance to the economy and overwhelming contribution to countrys exports. With the government still negotiating trade concessions with EU (e.g. GSP Plus status) and US (extension of ROZs etc.) and committed to implementing the textile package in phases, NML, being the largest textile composite unit in Pakistan, will be a key beneficiary of any future policy incentives/trade concessions.
Target Price
June-11 price target: PKR82.70/share (PKR31.10/share core & PKR51.60/share portfolio) based on sum of parts valuation.
Given its decent medium-term earnings growth potential and attractive current valuations, we recommend Outperform rating on the stock. Trading at attractive FY11 P/E and P/BV multiples of 6.1x and 0.72x respectively, the share offers 16.8% upside to our June 2011 target price of PKR82.7.
Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. FSL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may have recently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.
17 January 2011
NML PA
Stock price as of 14 Jan June 2011 target Upside/downside Valuation
- DCF based
Outperform
Rs Rs % Rs 70.8 82.7 16.8 82.7
Cement Sector Market cap 30-day avg turnover Market cap Number shares on issue
Year end 30 Jun Total revenue EBIT EBIT Growth Recurring profit Reported profit m m % m m 2010A 39,111 5,740 30.1 4,052 4,052
Rs bn US$m US$m m
2011E 43,455 5,782 0.7 3,976 3,976 2012E 47,909 6,257 8.2 4,441 4,441
Investment fundamentals
Fig 01- Segment wise production capacity Segment No of m/c Spindles Spinning 200k Looms- Sulzar Weaving 64 Looms- Air-jet Weaving 619 Dyeing m/c Processing 5 Printing m/c Processing 3 Power plant Power-Gen Source: Company accounts, FS research, Jan 2011
Rs %
8.29 129.9
11.53 39.0
11.31 (1.9)
12.63 11.7
PE rep Total DPS Total div yiel ROA ROE EV/EBITDA Net debt/equity Price/book
x Rs % % % x % x
Nishat Mills Spinning Division has more than 199,500 spindles, which are operationally organized into 8 spinning units. Nishat Mills Weaving Division has 619 modern air jet and projectile looms which produce approximate 7.4mn meters of fabric/month making it the largest weaving facility of Pakistan catering to home textile and apparel fabrics. There are two weaving units of NML. The unit at Lahore has 182 looms with production capacity of approximately 2.6mn meters/month and unit at Sheikhupura has 447 looms with production capacity of 4.8mn meters/month. With 600 modern new generation machines, the stitching department has an average capacity to process up to 2mn meters of fabric/month.
11%
19%
25
May-10 Jul-10 Mar-10 Sep-10 Jan-10 Nov-10 Jan-11
Source: Bloomberg, Foundation Research, Jan 2011 (all figures in PKR unless noted)
34%
35%
Sponsors FI/NDFI Individuals Others
40%
60%
30%
40%
20%
20%
10%
Apr-09
Dec-08
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Investment portfolio worth NMLs market cap, get core business for free
NML currently holds an investment portfolio (mainly comprises of equity investment in its associates) worth its own market capitalization. After taking discount of 25% on market prices and valuing MCB at our target price of PKR169, the portfolio value comes to PKR18.1bn (PKR51.6/share). NML mainly holds shares of MCB Bank Limited, D. G. Khan Cement Company Limited, Nishat Power Ltd. and AES power plants in its equity portfolio. The nature of these investments seems long term, as NML has not realized any capital gains on these investments even during high interest rate environment, when the company required cash to refinance its acquisition of power plants. Therefore, we expect NML will not realize capital gains in the medium term and company will hold these investments regardless of the market price. Consequently, only actual cash flows that are received from these investments are the dividend income. Dividend income from investment portfolio has always provided a cushion against volatile margins of textile business. However, with recent investments in low risk high yielding IPP business (NPL and AES acquisitions) starting to bear fruit, dividend income should show strong growth from FY11 onwards. The above will result in further stability and diversification in income. Fig 07 - Portfolio dividends (PKR/share of NML)
Portfolio Dividends (PKR/share) MCB Bank Nishat Power D.G. Khan Cement AES Lal Pir AES Pak Gen Total Dividends (PKR/share) FY10A 1.65 1.65 FY11E 1.65 0.16 0.63 1.02 3.45 FY12E 1.79 1.14 0.16 0.79 1.07 4.96 FY13E 1.79 1.43 0.33 0.82 1.12 5.50
AES Pakistan
AES Lal Pir and AES Pak Gen are Furnace Oil fired thermal IPPs with gross capacities of 362MW and 365MW respectively. The projects were commissioned in 1997/98 with a power purchase agreement term of 30 years with WAPDA. Nishat Mills Limited has recently acquired 32% shareholding in each power plant of AES Pakistan. According to company notices, the transaction has occurred at a substantial discount of 44% (Lalpir) and 56% (Pak Gen) to book value. Acquisition value of each IPP is around USD65mn, translating into a per MW cost of USD0.18mn, a substantial discount of more than 80% to the prevailing plant setup cost in excess of USD1mn/MW. As per our estimates these investments are expected to provide dividends of PKR578mn (PKR1.64/share) to the other income of NML in FY11.
Other Investments
The company also holds 31.4% and 14.2% shares of D. G. Khan cement and Nishat Chunian Limited with a current market value of PKR3,585mn and PKR563mn respectively, along with 15% stake in Security General Insurance and a very small holding of less than 1% in Adamjee Insurance. DGKC is expected to pay PKR100mn in the form of dividend income during FY11.
Fig 08 - NML Portfolio Stock MCB Bank Nishat Power D.G. Khan Cement AES Pak Gen AES Lal Pir Nishat Chunian Others Total Discount (25%) Portfolio value (PKR/share)
Mkt value (PKR Mn) 8,913 3,635 3,585 1,652 1,648 563 135 20,131 18,152 51.6
Source: Company accounts, FS research, January 2011 * Fair value estimated by FS research
Fig 09 - AES Pak-gen divestment at Rs19/share Investment reported at cost PKR mn No of shares to be divested mn shares Capital gain @ PKR19/share- after tax PKR mn Per share impact on EPS PKR/share
Source: Company accounts, FS research, January 2011
1,652 12 55 0.16
12%
4%
10%
8% 3% 6% 2% 4% 1% 2%
Debt to Equity
Debt to Asset
2.00
1.50
1.00
0.50
Gross Margin
Net Margin
25%
20%
15%
10%
5%
0.25 0.00 NML NCL KTML AMTEX ADMM
100
80
60
40
20
Fig 18 Value of PKR82.7/share based on sum of parts valuation (PKR mn) FY11E FY12E EBITDA 5,579 5,171 Less: Tax 450 442 Less: Change in Working capital 1,434 1,740 Less: Capex 1,487 1,804 Free Cash Flow 2,208 1,185 Discounted Free Cash Flow 2,208 1,013
(PKR mn) WACC (%) Terminal Value PV of Terminal Value FCFF Net Debt Equity Value Target price of Core operations (PKR) Portfolio value (PKR/share @ 25% Discount) Sum of Parts Target Price (PKR)
Source: FS Research, January 2011
10
Fig - 19 PER
Fig - 20 P/BV
P/B Average + 1std -1 std
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 -
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
11
Dec-10
Key risks
Volatility in cotton prices: Profitability of NML is highly correlated with volatility in raw material prices. Therefore, any increase or decrease in cotton prices against our estimates may affect cost of sales of the company. Local and international duty irregularities: NML is basically an export oriented textile composite unit with 76% of the companys sales revenue coming from the export sales. Consequently, imposition of any regulatory duty on exports may hurt companys profitability. Moreover on the flip side, expected removal of import duty on high end products (including knit wear and bed linen) will boost NMLs export volumes. Increase/decrease in dividend payouts from associates: Dividend income from associated companies is a major source of income for NML. Therefore, any decrease in the estimated dividend payouts by the group companies will hit NMLs profitability. Shortage of raw material: Availability of raw material is the most important variable for the smooth functioning of textile unit. In case of unavailability of raw material in the local market, the company has to import it from the international market at higher rates. This will increase the cost of production and have an adverse effect on the profitability of the company.
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Nishat Mills Limited (NML PA, Outperform, Target price PKR82.70) Balance Sheet 2010A 2011E 2012E Property Plant and Equipment Long term Investments Long term Loans Other Assets Total Assets Long term Financing Total Non Current Liabilities Trade Payables Short tem Finance Total Liabilities Common Equity Reserves Total S/H's Funds Cashflow Analysis EBITDA Tax Paid Chgs in Working Cap Net Interest Paid Other Operating Cashflow Capex Others Investing Cashflow Dividend Equity Raised Debt Movement Others Financing Cashflow Net Chg in Cash/Debt Quarterly performance Net Sales Cost of Sales Gross Profit Distribution Cost Administration Cost Operating Profit EBIT Financial charges Pre-Tax Profit Net Profit After Tax EPS m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m m 11,842 22,092 499 11,750 46,182 2,981 4,238 2,139 6,649 14,806 3,516 27,860 31,376 2010A 5,513 (371) (2,335) (1,127) 1,680 (1,206) (1,206) 879 1,091 648 2,619 3,093 2QFY10 7,757 6,449 1,308 401 135 771 841 288 553 497 1.41 12,205 23,197 524 14,673 50,599 2,839 4,221 2,691 8,312 16,050 3,516 31,034 34,550 2011E 6,948 (450) (1,434) (1,237) 3,826 (1,487) (1,487) 879 534 1,413 3,752 3QFY10 8,176 6,590 1,587 428 143 1,016 1,167 262 905 800 2.28 12,799 24,936 550 16,087 54,372 2,221 3,742 3,096 8,727 16,901 3,516 33,955 37,471 2012E 7,089 (442) (1,740) (1,363) 3,543 (1,804) (1,804) 1,055 274 1,328 3,068 4QFY10 9,207 7,303 1,904 543 141 1,220 1,554 318 1,235 1,105 3.14
2013E 13,671 26,183 577 17,684 58,116 1,936 3,609 3,447 9,164 17,258 3,516 37,341 40,857 2013E 7,685 (493) (1,804) (1,323) 4,064 (2,184) (2,184) 1,055 (181) 874 2,754 1QFY11 9,961 7,822 2,138 433 151 1,554 1,792 315 1,478 1,350 3.84
Profit & Loss Local Sales Export Sales Net Sales Cost of Sales Gross Profit Distribution Cost Administration Cost Operating Profit Other Operating Income Other Operating Expense EBIT Financial charges Pre-Tax Profit -Taxation Net Profit After Tax EPS (rep) EPS growth yoy (rep) EPS (adj) EPS growth yoy (adj) DPS Payout ratio Book value m m m m m m m m m
2010A 7,502 24,034 31,536 25,555 5,980 1,715 545 3,720 982 289 4,413 1,127 3,286 371 2,915 8.29 129.9 8.29 129.9 2.50 30.1 89.24
2011E 9,003 30,109 39,111 31,823 7,288 1,972 627 4,689 1,369 318 5,740 1,237 4,502 450 4,052 11.53 39.0 11.53 39.0 2.50 21.7 98.26
2012E 10,083 33,373 43,455 36,251 7,204 2,270 721 4,214 1,918 350 5,781 1,363 4,418 442 3,976 11.31 (1.9) 11.31 (1.9) 3.00 26.5 106.57
2013E 11,091 36,818 47,909 39,951 7,958 2,612 829 4,517 2,125 385 6,257 1,323 4,934 493 4,441 12.63 11.7 12.63 11.7 3.00 23.8 116.20
m m m m m
% % %
Key ratios Current Ratio Quick Ratio Cash Ratio Debt to total assets Total debt to Equity Debt % equity Long term debt to equity Long term debt % equity Earnings yield Dividend Yield Return on Equity Return on Assets Return on Fixed Assets % % % % x % x % % % % % %
2010A 1.1 0.5 0.0 0.2 0.3 34.3% 0.1 9.5% 12.8% 3.8% 9.3% 6.3% 8.5%
2011E 1.2 0.6 0.1 0.2 0.3 32.7% 0.1 8.2% 17.7% 3.8% 11.7% 8.0% 11.3%
2012E 1.2 0.5 (0.0) 0.2 0.3 30.9% 0.1 5.9% 17.4% 4.6% 10.6% 7.3% 10.4%
2013E 1.3 0.4 (0.1) 0.2 0.3 27.9% 0.0 4.7% 19.4% 4.6% 10.9% 7.6% 11.0%
All figures in PKR unless noted Source: Company data, FSL Research, January 2011
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Offices Karachi Ground Floor, Bahria Complex II MT Khan Road Karachi UAN: 111 000 375 PABX: +9221 35612290-94 Facsimile: +9221 35612262 PABX: +9251 2879460-66 Facsimile: +9251 2879469 Islamabad 2nd Floor, Block 11 School Road, F-6 Markaz Islamabad Lahore 1st Floor, 86 Y, Commercial Area Phase 3, DHA Lahore UAN: 111 000 375 PABX: +9242 35692781-90 Facsimile: +9242 35781575
Foundation Research Analyst Syed Suleman Akhtar, CFA Asim Wahab Khan, CFA Taha Khan Javed Naukhaiz Saleem, ACCA Mansoor Khanani Hassan Raza Shahzad Usman Database Sectors Economy, Banking E&P, Refineries, Oil Marketing Fertilizers, Power, Chemicals Telecom, FMCGs, Gas Marketing PABX +92 21 3561 2290-94 x 338 +92 21 3561 2290-94 x 335 +92 21 3561 2290-94 x 313 +92 21 3561 2290-94 x 339 +92 21 3561 2290-94 x 345 +92 21 3561 2290-94 x 311 +92 21 3561 2290-94 x 312 Email suleman.akhtar@fs.com.pk awkhan@fs.com.pk taha@fs.com.pk nsaleem@fs.com.pk mansoor.khanani@fs.com.pk hasan.raza@fs.com.pk shahzad.usman@fs.com.pk
Foundation Sales Trader Karachi Atif Muhammad Khan Siraj Ebrahim Kazi Syed Rehan Ali Zubair Ghulam Hussain Imran Abdul Aziz Faisal Khan Adnan Ahmed Usmani Islamabad Ehmer Iqbal Syed Salman Mansur Lahore Mehmood Afzal Butt Ata-ur-Rehman +92 21 3561 2253 +92 21 3561 2256 +92 21 3561 2259 +92 21 3563 5166 +92 21 3563 5013 +92 21 3561 2258 +92 21 3561 0887 atif@fs.com.pk siraj@fs.com.pk rehan@fs.com.pk zubair.hussain@fs.com.pk iaziz@fs.com.pk faisal@fs.com.pk adnan@fs.com.pk PABX Email
ehmer@fs.com.pk salman.mansur@fs.com.pk
mabutt@fs.com.pk arehman@fs.com.pk
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