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Tuesday, August 22nd, 2017

Morning Call about – Profitability upgraded, valuations re-rated! – Arif Habib Limited

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by March 27, 2013 Brokerage

Karachi, March 27, 2013 (PPI-OT): Nishat Mills Limited (NML) reported an astonishing growth of 69% QoQ in 2QFY13 profit after tax to PKR 1,795mn (EPS: PKR 5.10) from PKR 1,063mn a quarter earlier.

According to Arif Habib Limited Company’s top line witnessed a meagre growth of 3% to PKR 13.4bn, while real value was added by 180bps higher gross profit margin. Steady demand from domestic and international customers’ hence higher volumes improved the gross profit (margin).

The Spinning segment’s contribution to total sales reduced by 6ppt to 27%, however, its gross profit margin improved by 2ppt to 17%. Processing and Home Textile segment emerged as the leading segment in 2QFY13 taking half of the total sales while reporting 2ppt improvement in gross margin to 15%. Along with the improved core operations, further support was provided by the dividend income from associated companies. Other operating income contributed PKR 2.63/share towards the bottom-line, leaving behind core earnings of PKR 2.48/share, whereas core earnings for 1HFY13 stood at PKR 4.17/share, representing 51% of the total company profitability for period of 1HFY13.

Financial Highlights

PKR mn 2QFY13 1QFY13 QoQ FY13E FY12 YoY
Sales

13,362

12,955

3%

53,546

44,924

19%

Gross Profit

2,346

2,039

15%

9,207

6,789

36%

Gross Margins

18%

16%

2%

17%

15%

2%

Other operating income

924

470

96%

2,519

2,684

-6%

EBITDA

2,581

1,915

35%

9,091

7,015

30%

EBIDTA Margin

19%

15%

5%

17%

16%

1%

Finance cost

402

429

-6%

1,710

1,761

-3%

Taxation

78

133

-41%

448

553

-19%

Profit after taxation

1,795

1,063

69%

5,669

3,529

61%

Net Margins

13%

8%

5%

11%

8%

3%

EPS: (PKR)

5.10

3.02

16.12

10.04

DPS: (PKR)

4.00

3.50

14%

Source: Company accounts and Arif Habib Research

Outlook looks brighter!

With the cotton prices following a steady upright path, coming quarters are expected to represent a good period for the Textile sector in general, and NML in particular. Growing cotton prices make us believe to see over 100bps improvement in 2HFY13 gross margins to 17.7% against 16.6% in 1HFY13. Improved gas situation post-winter along with management’s effort to bring down energy cost should bode well for the stakeholders. At macro level, formal application submitted for the grant of GSP-plus status by Gov’t signals much better time ahead.

Recommendation

Upon marking to market NML’s investment portfolio amid healthy sector dynamics, Arif Habib Limited SoTP-based value for NML stands at PKR 103/share for Jun-13. The breakdown suggests portfolio contributing PKR 57/share while the core at PKR 46/share. The fair value offers a healthy upside potential of 24% from last closing, which after taking into account dividend yield of 5% (FY13E DPS: PKR 4) makes NML a strong ‘BUY’ candidate from Arif Habib Limited Textiles universe!

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